Mercedes-Benz is gambling $1 billion on a factory in Hungary, in its bid to overtake BMW. Meanwhile, analysts wonder if that's too much money too late in a sinking European market, reports Bloomberg Businessweek.
A $1.07 billion factory, located in Kecskemet, about 56 miles southeast of Budapest, has begun production of the Mercedes B-Class compact, marking the carmaker’s first new assembly plant in 15 years -- and likely the last major auto facility to be built in Europe.
“This could be the final big plant by a European carmaker in the region,” said Carol Thomas, an analyst with LMC Automotive in Oxford, England. “The factory is coming quite a bit later than others in Europe, which is struggling with overcapacity. The growth and expansion has shifted to Asia and Latin America.”
Daimler Chief Executive Officer Dieter Zetsche is flouting capacity concerns in Europe to take on BMW’s 1-Series and X1 in the market for price-sensitive compact cars. With Hungarian workers paid a fifth of what their German counterparts demand, Daimler needs the factory to meet its goal of boosting sales 27 percent to at least 1.6 million vehicles by 2015, while at the same time raising profitability with models like the A-Class hatchback and a compact sport-utility vehicle.
“We are on the offensive,” Zetsche said today at the official plant opening. “Our entire team is focused on reclaiming the leadership position.”
To reach this goal, Mercedes plans to grow at “above- average” rates in markets such as China, India and the U.S. by tailoring cars to local tastes and expanding sales networks, Zetsche said.
Production Surge
The Kecskemet plant, the first new Mercedes factory since it began producing cars in Alabama in 1997, will be paired with the production from the factory in Rastatt, Germany, which underwent a $792 million expansion to meet anticipated demand for the small cars. Mercedes produces the A-Class and B- Class in Rastatt.
Combined, the Kecskemet and Rastatt plants will have an estimated capacity of about 450,000 vehicles, which would be equivalent to 35 percent of Mercedes car sales this year, according to data from IHS Automotive.
“They need high volume to pay for all that investment,” said Christoph Stuermer, a Frankfurt-based analyst with IHS. “The stakes are high.”
Factory Expansion
The Hungarian factory, which will also produce the new CLA four-door coupe from 2013, will have initial capacity of 100,000 vehicles a year and could “easily” be increased to 200,000, Mercedes production chief Wolfgang Bernhard said. Manufacturing costs at the plant are 30 percent lower than in Germany, chiefly because of cheaper labor costs, he said.
Jobs at the plant are already being added, with 500 new hires planned by the end of this year to help fill more than 100,000 orders for the B-Class.
Lower production costs, including increased parts sharing, are part of Mercedes plans to save $7.9 billionby 2017 to offset rising raw material costs and increased spending to lower carbon-dioxide emissions of its vehicles, the company said.
The Franklfurt stock market response was not encouraging, as the factory swung into production. Daimler dropped as much as 3 percent, to 44.42 euros. The shares have fallen 26 percent in the last five years, valuing the Stuttgart, Germany-based carmaker, which is also the world’s biggest truckmaker, at $63.4 billion. BMW stock has gained 51 percent over the same period, giving the world’s largest maker of a luxury autos a market capitalization of $55.9 billion.
‘Painful’ Cuts Needed
The factory will add to car-making excess in Europe, where auto sales are poised to decline for the fifth consecutive year in 2012. The slump means that the region’s carmakers will probably use about 65 percent of total production capacity this year, down from 71 percent last year, according to LMC Automotive. The unused assembly lines could manufacture about 10 million vehicles, the market researcher said.
The capacity overhang requires plant closures and job cuts to make auto production in Europe profitable again, according to Sergio Marchionne, chief executive officer of Fiat SpA (F) and Chrysler Group LLC.
“It has to be painful, when you are talking about reductions,” Marchionne said last week in Bruges, Belgium. “It’s going to have initially a negative impact on employment.”
Fiat last year closed a factory in Sicily in an effort to end losses in the region. In February, Mitsubishi Motors Corp. (7211) said it will stop making cars at its factory in the Netherlands after failing to come up with a plan to maintain production.––Paul Duchene
