Mercedes-Benz announces cost-cutting program

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Daimler launches a cost-cutting program focused on reducing labor costs and increasing profit margins at its Mercedes-Benz Cars division. Called “Next Stage”, it is expected to run through 2020, in Mercedes’ quest to surpass rivals BMW and Audi as the biggest and most profitable premium brand in the world.

On the short therm, the new efficiency measures should help the German Group reach its bold targets for record sales, revenue and profits set for 2015. In recent years, Mercedes-Benz could not match the higher margins enjoyed by Audi and BMW.

The main culprit remains the large workforce Daimler employs, 72 percent more than Audi and 26 percent more than BMW. Values which generate higher labor costs to sales ratio, according to investment adviser ISI Group.

Mercedes-Benz still favors building many components itself as opposed to outsourcing them. Transmissions, for example, are assembled near Stuttgart. In contrast, BMW turns to big suppliers such as ZF Friedrichshafen.

Now, Daimler CEO Dieter Zetsche wants to boost worker productivity by improving the efficiency of procurement for its manufacturing operations.

“We have enacted massive efficiency programs in r&d, for example, that allow more cars to be developed without the corresponding need for more engineers and that principle will be applied to all areas of value creation throughout the company,” Zetsche explains. “The marked structural developments in our retail (through the sale of wholly-owned German car dealerships), but also in wholesale, give us efficiency gains – these and many more are all examples of the contributions made with respect to the target that fixed costs grow significantly less than our revenue”.

As a result, Daimler aims for 800 million euros in additional gross earnings improvement this year, as well as around 5 percent growth in vehicle sales and 10 percent increase in operating profit from its ongoing business this year.

Last year, the German Group sold 2.5 million vehicles and enjoyed a 10 percent revenue rose to nearly 130 billion euros. The operating profit from its ongoing business also rose 27 percent to 10.1 billion.

“We intend to reach a level of profitability that is unprecedented at this company,” Zetsche concluded.