BERLIN -- Daimler AG celebrated its 125-year anniversary in January, enjoying a market valuation that was 17 billion euros ($23 billion) more than BMW AG's. That gap has now all but disappeared.
The Mercedes-Benz maker's lead over BMW, which reached 39 billion euros in 2007, has dwindled to 700 million euros. Declining demand for some older models and the cost of introducing new, smaller cars will make it tough to rebuild its lead in 2012.
Daimler "is big and takes a long time to change course," said Arndt Ellinghorst, a Credit Suisse analyst in London, who's followed the company for more than a decade. "Management seems to still think that the ship is impregnable, but it's clearly taking on water."
Though Daimler, based in Stuttgart, and its main rival now have similar market valuations, BMW employs less than half Daimler's 270,000 staff and generated 38 percent less revenue last year.
The shrinking value gap mostly reflects Daimler's loss of leadership in the German luxury car market. It also shows investors are assigning little value to Daimler's trucks business, with 24 billion euros in sales, or to its stake in European Aeronautic, Defence & Space Co.
"Daimler's most profitable division is the premium auto business, and you can invest in that in its pure form in BMW," said Juergen Meyer, a fund manager at SEB Asset Management in Frankfurt, who oversees about 760 million euros and owns stock in the two manufacturers.
The majority of analysts following the two automakers recommend buying the shares -- 23 of 43 for Daimler and 22 of 41 for BMW, according to Bloomberg data.
Target prices suggest Daimler's market value will climb to 49.3 billion euros, which would make it 8.6 billion euros more valuable than BMW's projected worth -- or about half of January's gap.
Daimler's market value has declined 42 percent to 36.5 billion euros after hitting a 52-week high on Jan. 18. Over the same period, BMW has slipped 6 percent and is currently worth 35.9 billion euros.
Mercedes, which held the lead in global luxury-car sales until BMW took the top spot in 2005, dropped to third this year behind Volkswagen AG's Audi. "We are focused on executing our strategy and are fully on track to sustainably reach our announced profitability objectives from 2013 onward," said Florian Martens, a spokesman for Daimler in Stuttgart.
BMW CEO Norbert Reithofer cut supply costs by more than 4 billion euros, while expanding production in China and the United States and rolling out new models like the X1 compact SUV.
The company also underscored a reputation for innovation by developing an electric-powered city car that will be introduced in 2013, part of its goal to boost sales of BMW and Mini vehicles to 2 million by 2020 from 1.6 million.
"What our investors are telling us is the strategy that we embarked upon in 2008 is the right one," Ian Robertson, BMW's management board member in charge of sales said in a Bloomberg Television interview last week in Tokyo.
Daimler CEO Dieter Zetsche struggled to introduce smaller, cheaper Mercedes models to appeal to young urban consumers, because the underpinnings of the high-riding A-class compact, which were designed for an electric powertrain that was never needed, were costly and lacked flexibility. The company also failed to challenge BMW's Rolls-Royce in the ultra-luxury segment, deciding last month to drop its Maybach brand.
Daimler's car unit, which includes Mercedes and the Smart brand, increased sales 8 percent to 42.3 billion euros in the first nine months months of 2011, trailing BMW's 20 percent gain to 46.4 billion euros in auto revenue. Profitability has also lagged. Mercedes reported earnings before interest and taxes this year equivalent to 9.4 percent of sales, compared with 12.8 percent at BMW and 12.2 percent at Audi.
Next year may not be much better. The S-class flagship enters its final year before being overhauled in 2013, while spending to introduce five compact models, including 1.4 billion euros to expand production, adds costs.
BMW's revamped 3-series will also likely dampen demand for the best-selling C class. "Daimler has almost no chance of maintaining its profit level next year," said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. "[Next year] will be a weak year."
It's been a long, slow decline for Mercedes. In 2001, the brand was the clear luxury-car leader delivering 233,000 more cars than BMW and 390,000 more than Audi. This year, Mercedes will likely sell 1.23 million cars, behind Audi's 1.24 million and BMW's 1.34 million, according to IHS Automotive.
Over the past 10 years, the two German rivals increased sales five times more than Mercedes, as they moved more quickly into growing segments such as compact SUVs and expanded earlier into China and other fast-growing markets.
Zetsche has set his sights on improving Mercedes's profit margin to at least 10 percent by 2013 and surpassing BMW and Audi by 2020.
A range of five small cars, including a hatchback and SUV, is meant to boost sales volumes and attract young drivers to offset the risk of being pigeonholed as a brand for retirees.
"Mercedes needs to make its models more appealing for young people," said Hans-Peter Wodniok, an analyst at Fairesearch in Kronberg, Germany. "Right now, BMW has the better growth prospects because of its youthful appeal. Changing perception is a strategy that takes years."