Daimler has revealed the dark secret that explains exactly why the German auto industry has been so loath to embrace electric cars until now, years after Elon Musk founded Tesla and Carlos Ghosn pushed electrification at Nissan and Renault.
The German automaker on Monday acknowledged that a roll out of EVs, even those with its iconic three-pointed star on the hood, will cannibalize sales from their combustion-engine lineup and, perhaps most importantly, will be half as profitable.
Once its family of EQ battery electric vehicles start selling in large quantities come early next decade, Daimler's Mercedes-Benz passenger car division could see two full percentage points knocked off of its operating margin. As a result, it plans to cut costs by 4 billion euros - twice the size of its initial two-year program through 2014, when it was still trying to catch up with more profitable rivals.
While not your classic profit warning (as no specific time from was given), the comments confirm that EVs currently reduce the structural profitability of a company like Daimler in a material way as many investors had feared. For at least another eight years, the equation will remain skewed against EVs and only in 2025 does Daimler expect a rising cost curve for combustion cars to intersect with a declining curve for EVs.
The higher the initial uptake, the more pressure Mercedes expects on its returns logically. That’s the negative interpretation which investors have largely adopted. The positive flipside is the sooner they sell their EVs in large quantities the faster they will be able to generate meaningful scale effects and bring down costs.
Typically, the German manufacturers are the first to jump on important trends. Take Mercedes: the first antilock brakes in a series production car debuted in the S class as did the anti-roll electronic stability program, just to pick out a couple of examples from a long line of safety innovations the brand has pioneered.
Audi meanwhile is breaking new ground with its Level 3 conditionally autonomous Traffic Jam Pilot and technology so advanced that regulators haven't yet designed a way to approve it for use in the upcoming A8 sedan.
But when it comes to electromobility, regulators drive demand. Even in a state as progressive as California there are still zero-emissions credits to ensure carmakers are required to sell a certain number of electric vehicles every year. I wouldn't want to know just how bad Tesla's losses would otherwise have been had they not been able to sell these ZEV credits to other carmakers in exchange for revenue that essentially is pure incremental profit.
The infrastructure for EV's is also so poor that carmakers like Daimler, Ford, BMW, and Volkswagen are having to invest in a charging network themselves, copying Tesla's lead, when it should be specialist service providers that build them.
Since when, for example, do carmakers' construct and operate their own chain of filling stations?
It's not that German automakers have been asleep at the wheel, they just couldn't justify EVs economically. Were it not for the Chinese and European markets cracking down on local CO2 emissions from passenger car traffic in part to mitigate climate change effects, they still probably wouldn't.
After all, which money manager on Wall Street or in London's City district would willingly say they would be fine with a 2-percentage point drop in profit margins? No wonder Daimler shares have lost nearly a tenth of their value since the start of this year despite a 9 percent gain in the broader German blue chip index.
The secret is finally out in the open: EVs are bad for business - even for premium brands.