Article
Industry Interview, Interviews, Issue 45 - Summer 2012

Industry Interview: Dr Dieter Zetsche

Dave Leggett hears from Daimler’s CEO and Chairman. 

Mercedes-Benz is on a roll this year and on track for record car sales. From January to June, a total of 652,924 Mercedes cars were sold, almost 7% up on last year. Chairman and CEO Dieter Zetsche is highly satisfied with the performance given the travails of the global economy and Europe’s particular problems.

He highlights the importance of emerging markets for a premium car brand like Mercedes, but without losing sight of traditional markets and strengths.

“We look for maintaining and increasing our strength in developed markets, but at the same time we want to add strong leverage of the growth potential in emerging markets such as China”he says.

The first half sales totals illustrate the importance these days, in particular, of the Asia-Pacific region. It accounted for 166,740 units, 8.6% ahead of a year earlier. There’s a bounce-back in Japan this year, but China is now by far the biggest market in Asia for Mercedes-Benz: first half sales were 99,391 units, 7.8% up on last year. But the traditional developed markets still make up the bulk of sales: Western Europe and NAFTA sales accounted for two-thirds of Mercedes’ first half car sales. The biggest national markets for Mercedes are the US and Germany (US H1 sales up almost 16% to 128,595 units; Germany up 4.5% to 128,529).

And Zetsche sticks to that combination of ‘traditional’ and ‘non-traditional’ theme when viewing the product evolution.

“We want to make our internal combustion engines more efficient, but at the same time adding alternative drivelines, which we are showing for example with the all-electric smart which is launching this year.

And with the product portfolio, we want to stay on top with large cars. The CLS shooting brake is a good example of our strength and depth in this area. But we also want to add more strength in compact car segments.” 

If Mercedes is going to hit its long-term targets for volume growth, China is going to play a vital part. Is he worried about the risks – economic or political – associated with China? He draws on the past to play them down.

“China has been, for that last fifteen years, the least volatile market of any in the world. It came  through the Asian [economic] crisis, the financial crisis, with very solid growth continuing. It doesn’t mean that it will continue that way, but among all the question marks for the future development of the world, I would say that the Chinese one is a smaller one.”

Zetsche mentions the need for economic management in China to provide sufficient employment, but not to overshoot. He sees continued economic growth and growth of car sales through this decade in China as the most likely scenario.

In the short-term, Europe is a much more pressing concern. Zetsche highlights the mixed picture across the continent but sees some underlying robustness for the premium segment.

“We had hoped for better market conditions in Europe, but within those conditions, we are doing relatively well and our sales are up this year. We are also more competitive and that is being helped by a stronger competitive position in compact cars, which are especially important in Europe.”

‘Compact premium’ a strategic focus

The B-Class has been a strong seller this year and Mercedes will get a boost from the new A-Class over the next few months. Compact models are going to be a strategic focus for the brand in the medium- and long-term.

“The range of Mercedes products in the premium compact segment will increase from the previous two to five models. These five newcomers will be a major driving force in our Mercedes-Benz 2020 growth strategy.”

“The new generation will make a major contribution to our objective of making Mercedes-Benz the number one in the worldwide premium segment by the end of the decade at the latest. This attack is being launched at the right time because there is increasing demand in the premium compact segment. Over the next 10 years, the market for these will increase from the current 6.57m to around 10.6m units globally.”

The focus on compact cars also helps with lowering average CO2 for the brand and Zetsche sees an industry convergence around broadly similar efforts to lower CO2 and improve fleet efficiency. It’s about lowering air drag coefficients, downsizing engines with turbochargers and light weighting wherever possible.

“Nobody has an exclusive technology which others can’t use” he says. “It is ultimately leading to similar results but with a lot of cost involved.”

Zetsche is confident that his company has a strong R&D capability able to meet the challenges ahead.

“As a group we are somewhere between EUR100bn and EUR110bn revenues and we are running R&D budgets at 5+%, so that’s EUR5bn-EUR6bn a year. It doesn’t matter if you sell three times as many small cars, it matters what kind of revenues you are generating. We are second to none as far as our technological resources and capabilities are concerned.”

There’s a potential difficulty though. If there’s a cost squeeze going on, won’t the change to model-mix to include more small (and lower margin) cars adversely impact future profit?

“We have to make sure that these smaller cars are more profitable than they used to be. Our new compact car family will have significantly higher volumes, with a lower labour cost average. We believe we will be very competitive, which allows us some price premium. We think we will have top profitability in that segment.”

It seems likely that Mercedes will be looking to add around 100,000 units of annual production capacity for the new small cars and to shift the geographic production balance so that more of these future small cars are made in low-cost parts of the world.

“We are investigating production in China and looking at ways to expand capacity in Russia and we are very optimistic about the volume prospects and opportunities for us ahead in compact cars.”

Partnership with Nissan

Another route to reducing cost is to collaborate with others. Nissan is a partner. Daimler and the Renault-Nissan Alliance announced a ‘strategic collaboration’ in April 2010 and are extending their reach into the US as part of both companies’ growth strategy. They are working on vehicle platform sharing between Infiniti and Mercedes and developing ‘zero-emission’ [electric] vehicles. Jointly producing engines in the US is the largest joint venture outside Europe.

In May Nissan’s US unit broke ground for an engine plant that will produce I4 petrol engines for Infiniti and Mercedes-Benz C-class cars assembled at Daimler’s plant at Tuscaloosa, Alabama.

“Through the strategic extension of our cooperation with Renault-Nissan we can realise near-market engine production in the NAFTA region on attractive economic terms and make optimum use of synergies arising from the cooperation. This helps us to reduce our foreign exchange exposure and with logistics also in terms of supplying our assembly plant at Tuscaloosa. It’s a huge investment for an engine plant and you need certain volumes to make it feasible. By joining forces with Nissan we can add volume for the engine plant and keep the cost down.”

Zestche speaks very positively about the developing relationship with Nissan and how such opportunities have become clearer since they agreed their strategic partnership. He sees it as the reverse of the DaimlerChrysler experience.

“The cooperation we have with Renault-Nissan is a very rational one. With DaimlerChrysler we joined forces and then looked at where we could cooperate. This time, we looked at our two companies and strategic areas where we could leverage a partnership to meet future targets. One, for example, was our next generation smart cars; one was small four-cylinder engines; a third was small vans. We could do these things on our own but it is better to leverage the incremental volume that comes with working with a partner. And the 3% cross-shareholdings were a symbol of the partnership.”

Zetsche describes a disciplined management approach to the cooperation between the two companies.

“There are monthly management meetings between the three brands; Carlos and I see the papers and results and participate in the meetings every third time – which is four times a year.”

The meetings discuss potential new projects, but focus is highlighted. “The first priority is to do what we are already doing right” Zetsche emphasises.

He’s also pretty relaxed about supplying engines to power Nissan’s Infiniti brand, not seeing it as a major head-to-head competitor in the premium brands area. The small number of Nissan customers considering a Japanese or a German premium brand are mainly considering Infiniti or BMW, Zetsche maintains. And the Mercedes brand comes more into the Japanese/German premium cross-consideration competitive mix with Lexus.

Besides the direct cooperation on engines and platforms, there are also insights to be gained from working with a partner with a different culture and approach.

“They [Infiniti] have been able to get results with relatively low investment,” Zetsche acknowledges. Speccing cars is one area where Infiniti’s approach has been very different to Mercedes. “We are potentially speccing some things that are not adding value. These are very interesting learning experiences we are having.”

Technologies for the future

What does Zetsche see as the key technological direction for Mercedes for the future?

“We are following the vision of emission free driving on the one hand, and accident free driving on the other.”

Zetsche qualifies that by outlining three main strategic thrusts for the Daimler Group:

  • Emerging markets
  • Being ‘green’
  • Being ‘digitalised’

Being ‘digitalised’, Zetsche explains, has many aspects and levels. “It is about the workplace, about the customer relationship, mobility concepts [connectivity, car and customer].”

To pick up on mobility, does he see the autonomous car around the corner?

“Technologically, it is not a big deal. There are, however, two major constraints. One is legal and the question of liability [with accidents that may occur when the driver is not in control]. And secondly, we want to keep the driver in control. We want to build a safety net around the driver.”

Zetsche describes the possibility of hackers causing problems for autonomous systems as well as zealous government regulators proactively controlling things like vehicle speeds remotely.

“We don’t like these scenarios and we are not striving for the autonomous car. We think we are at the leading edge as far as the technologies are concerned, but we want to use it for accident free driving and not for autonomous driving.”

How far away are fuel cells?

“Technically, I think we are there. We can offer a car to a customer that is reliable, which has similar driving characteristics to a combustion engine driven car and the customer can enjoy it. What’s missing now is the benefit of high volume industrial processes for cost efficiency. And you also need infrastructure, for the battery-electric car and the fuel cell car. The difference is that you can make the first steps for the battery-electric car from your garage, but you can’t with a fuel cell car. The cost to allow the fleet to grow is rather higher for battery-electric than for fuel cell because of the charge times being higher requiring more charge points.

We’re working with other OEMs, governments, utilities and making some progress. It’s about lobbying and creating momentum.”

It does seem to be taking time though, in the classic chicken and egg manner. Zetsche sounds an optimistic and confident note.

“I have no doubt about the product and the technology. We are more optimistic about the possibility to get to cost levels where you start to become competitive.”

What would that cost level be?

“It would be in the range of a diesel hybrid and we are not quite there yet, but we see that as a realistic objective.” And how far away is that? “We’re talking about five years.”

Mercedes has developed a fuel cell for the B-class. Zetsche sees that fuel cell applications as having a role distinct from battery electric cars and therefore featuring in bigger vehicles.

“Battery electric is basically for urban use and small cars.  Fuel cells [with longer range] have possibilities outside the city and for larger cars. We have an execution that can go in the engine compartment of a conventional sedan.”

But how far away are they, really?

“I believe that in 3-5 years you will be able to go to a showroom and buy a fuel cell vehicle. By the end of the decade you will see them in some numbers on the streets.” 

As far as combustion engines go, Zetsche sees diesel engines declining in small cars as more efficient gasoline engines gain ground. On the other hand, there are efficiency refinements coming on diesel engines to improve efficiency and Zetsche sees diesel as retaining their central importance for Mercedes cars in the future.

“Diesel has a major impact on our overall average CO2 fleet average. Now we have diesel hybrids also. The emission targets are expensive to meet and we have established diesel technologies.”

In the field of electric vehicles, Daimler is cooperating with Renault-Nissan and with Tesla. Is there a potential conflict? Zetsche highlights the need to have broad contacts and influences in this area of emerging technologies. “We think it is smart to understand what is going on in more than your own field. We were the first to cooperate with Tesla and we have a preferential partnership with them. They learn from us, we learn from them. We are happy with our partnership with Nissan and with Renault and when it comes to specific technologies – such as fuel cell – we see two partners who can join forces to become more efficient. It’s a balance.”

So would that be small EVs for partnership with Renault-Nissan and larger vehicles with Tesla?

“We do not have a general strategy in this regard…with the last generation [electric] smart we worked with Tesla and for the new one we will have our own battery which will be used in a Renault vehicle as well.”

While working with partners is an important part of the Daimler strategy, Zetsche underlines the importance of developing products that can adequately differentiate the brand.

“We are in a transformation in our industry right now. When we look at alternative drivelines, there is plenty of room to differentiate yourself from others and the same things apply to areas like digitalise and safety. I find it amazing how big the differences can be in some of these fields.”

Zetsche acknowledges industry convergence in areas of basic vehicle quality and capabilities, but sees a continuing place for premium brands.

“I am not afraid that there will not be enough room for premium manufacturers altogether or for Mercedes-Benz in particular, to set itself apart from the rest.”

Author: Dave Leggett.

Dr. Dieter Zetsche, Daimler’s CEO and Chairman

 

Dr. Dieter Zetsche

Dr. Dieter Zetsche has been a member of the Board of Management of Daimler AG since December 16, 1998, and Chairman of the Board of Management of Daimler AG since January 1, 2006. He is also Head of Mercedes-Benz Cars Division which includes passenger cars of the brands Mercedes-Benz, Maybach and smart as well as Mercedes-Benz AMG and Mercedes-Benz McLaren.

Dr. Zetsche was born in Istanbul, Turkey, on May 5, 1953. After attending school in Frankfurt and obtaining the Abitur (university entrance examination), he studied electrical engineering from 1971 to 1976 at the University of Karlsruhe and graduated as an engineer. He joined the research department of the then Daimler-Benz AG in 1976 and became assistant to the Development Manager in the Commercial Vehicles business unit in 1981.

Dr. Zetsche completed a doctorate in engineering in 1982 at the University of Paderborn. From 1984, as part of the Daimler-Benz Commercial Vehicles Management Development Team, he was responsible for the coordination of international development activities.

 

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