For decades, size was what counted most at Mercedes-Benz. The dream of the “Welt AG” with Chrysler burst abruptly, but the brand with the star was later able to console itself by selling more cars than arch-rival BMW. In order to permanently dominate the premium league, Mercedes expanded its model range to more than 40 manufactures and derivatives. But that is over now. CEO Ola Källenius breaks with the sales mantra of his predecessors. At the end of May, the Swede announced that he would be dropping three out of seven compact cars. Marge comes before crowd.
So far, Källenius has only left open which models will be eliminated and which will remain. The Handelsblatt has now learned from four insiders that Mercedes intends to concentrate on the construction of the CLA Coupé, GLA, GLB and CLA Shooting Brake in the future. The A-Class in all forms (hatchback, notchback, long sedan) and the B-Class, on the other hand, will be discontinued in three to four years. Mercedes declined to comment.
The end of the A class is a turning point for the Dax group and the industry. The series is the best-selling Mercedes vehicle in Europe and, alongside the VW Golf, the Skoda Octavia, the Toyota Corolla and the Ford Focus, is one of the absolute bestsellers among compact vehicles.
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Green Transport Minister Hermann: “A mistake if you only build cars for the rich and super-rich”
Internally, many are struggling with the decision. Mercedes has been focusing on luxury instead of mass for a long time. But some in the leadership team advocate a middle ground. A supervisory board warns: “Smaller models must remain part of the family with the three-pointed star.” The departure from the A- and B-Class should by no means initiate the gradual end of all compact cars at Mercedes.
External criticism is sometimes harsh. “I think this strategy is a mistake, it will also lead to acceptance problems if you only build cars for the rich and super-rich,” said Winfried Hermann, Green Minister of Transport in Baden-Württemberg. Even those who have been familiar with the scene for many years are skeptical about Källenius’ strategy of growing in the future, above all, with particularly large and lucrative models such as the S-Class, GLS or G-Class, all of which cost more than 100,000 euros with proper equipment.
“The world of the rich and beautiful sounds exciting and promises fabulous returns at first glance,” says Ferdinand Dudenhöffer, head of the Center Automotive Research (CAR). “In the car business, however, a shrinking process is a very big risk.” Especially now that vehicles are being equipped with increasingly powerful computers, operating systems and long-range batteries, economies of scale are more important than ever.
“Software is developed once and then multiplied at virtually zero cost,” says Dudenhöffer. Thanks to their large volume, corporations such as Volkswagen would benefit from this in the future, while Mercedes “loses a significant degree of cost advantages”.
Mercedes boss Källenius: A maximum of 2.5 million cars sold a year
Källenius sees it completely differently. The 53-year-old repeatedly emphasizes that he does not want to compete with mass manufacturers. “Focus is a strength,” the Scandinavian drums into his squad. To do this, he reduces supply and raises prices. Källenius has revised the goal of his predecessor Dieter Zetsche to increase annual sales from the last 2.1 million vehicles to more than three million units by 2030.
In the medium term, the manager aims to sell a maximum of 2.5 million cars per year. To do this, he shifts the product mix. The volume of compact cars should remain at the level of the previous year, i.e. at around 570,000 vehicles. In the upper middle class, on the other hand, Mercedes wants to grow properly with brands such as the C-Class, EQC and E-Class. And at the top with EQS, Maybach and AMG even increasing by 60 percent.
There can therefore be no talk of a “shrinkage course”, according to Källenius. In addition, in its almost 140-year history, Mercedes has got along well without small makes like the A-Class for most of the time. Real fans of the brand consider the C-Class to be the “Baby-Benz” anyway. Nevertheless, the A-Class is said to have legendary status.
The reason: Shortly after the market launch in 1997, the series tipped over in the so-called “moose test”. A disaster. Mercedes then stopped production, revised the chassis and equipped the A-Class with the Electronic Stability Program ESP as standard.
Customers appreciated the upgrade. In 1998, Mercedes sold almost 120,000 A-Class vehicles in Europe from scratch, and a year later sales had climbed to almost 180,000 units. But the concept of the short minivan quickly became obsolete. Deliveries plummeted from 2008 to 2012.
Old Mercedes A class
The compact car initially drew attention to itself primarily through the moose test – and then gained in popularity.
(Photo: dpa)
The chief designer Gorden Wagener, who was newly installed at the time and is still in office today, disposed of the old sandwich construction and flattened the A-Class. The model suddenly attracted significantly more young customers. Success returned. But returns have always been problematic. In principle, the smaller the model, the smaller the contribution margin.
End of the Mercedes A class: too little margin, too European
In addition, Mercedes only wants to build “world cars” in the future, i.e. vehicles that work equally well in the three major regions of Europe, the USA and China. In this way, the group wants to better cushion any market fluctuations. However, the A-Class is not very popular in the United States.
The overseas expansion initiated in 2019 has failed. The hoped-for volumes were not achieved. Just 8,100 units of the A-Class sedan were sold in the US last year. A few months ago, the management in Stuttgart pulled the ripcord. The sedan will be taken off the market later this year.
In China, the sales figures for the extra-long A-Class are quite decent, but the margin is not right; too many vehicles apparently ended up in unprofitable canals. A no-go for CEO Källenius. Every model, regardless of whether it is small or large, short or long, must in future generate clearly double-digit contribution margins, is his internal requirement. Otherwise, the goal of achieving a return on sales of more than 14 percent at group level by 2025 would be jeopardized.
In short: The A-Class is too European and delivers too little profit. In addition, the growth prospects for small sedans are meager; half the world prefers to drive SUVs. For Källenius, the end of the A class is a rational decision. And with the B-Class there are no discussions anyway. The minivan segment is “dead as a doornail,” says one manager. In fact, the sales of the B-Class have been under plan for years.
Last year, for the first time, Mercedes sold more vehicles from the two compact SUV series GLA and GLB in Europe, China and the USA than vehicles from the A and B classes. A turning point. The Stuttgart-based company does not fear a major loss of customers due to the elimination of the two entry-level models. Most A-Class drivers would simply switch to other Mercedes models, so the hope. Especially since the Swabians want to significantly upgrade their remaining compact cars.
CLA as a new, more expensive entry-level model
In the second half of 2024, the CLA, the first series on the new MMA platform, will be launched. The focus of the model, which will also be available as a long version in China, is on the electric drive. With the sedan, Mercedes is aiming for a record range of up to 850 kilometers through improved cell chemistry. Neither EQS nor Lucid Air can do that today.
Beefy and therefore less efficient compact models like the GLB should still be able to cover 650 kilometers without recharging. Alternatively, a final petrol variant will be available. All MMA brands get the Linux-based operating system MB.OS and the option of highly automated driving functions (level 3).
This will make driving a Mercedes more expensive in the foreseeable future. The point of entry into the starry world is shifting from the A-Class at the base price of 28,393 euros to the CLA, which already costs around 6,000 euros more. The many technical improvements are priced on top of that. It is questionable whether Mercedes will even offer a vehicle under 40,000 euros from 2024.
Other premium manufacturers also rely on margins and luxury
Other premium manufacturers are following a similar course. Audi is also dropping its entry-level models, the A1 and the Q2. But no other German car manufacturer relies on luxury as consistently as Mercedes. In the compact segment, the group could even surprise with a spectacular additional series.
Internally, it is eagerly calculated whether the production of a small G-Class is worthwhile. The original, an angular off-road vehicle, is currently sold out in Germany. Källenius sometimes jokingly compares the G-Class with the “Birkin Bag” from Hermès, since interested parties have to wait up to three years for both the classy handbag and the 2.4-tonne car.
With such an enormous demand, a miniature version of the G-Class is an obvious way to spread the success. The idea has many advocates at Mercedes. And there is a clear indication that a Mini-G could actually roll out soon: nobody denies it.
More: Mercedes brings Chinese McKinsey manager as Chief Strategy Officer.