This article first appeared in The Edge Malaysia Weekly on October 16, 2017 - October 22, 2017

MERCEDES-BENZ Malaysia Sdn Bhd (MBM) may have sold a record number of vehicles last year but that did not help the premium marque’s profitability, which fell sharply as margins came under pressure.

The sales of the brand custodian and distributor of Mercedes-Benz vehicles in Malaysia hit an all-time high of 11,779 units last year, up 9% from 10,845 units in 2015.

Interestingly, a quick search on the Companies Commission of Malaysia’s website shows that despite a 3% year-on-year increase in revenue to RM3.844 billion last year, MBM’s net profit declined 38% to RM346.74 million.

In other words, the company’s net margin shrank from 15% in 2015 to 9% last year. According to car dealers, the increase in MBM’s sales volume came mainly from lower-priced models.

In an exclusive interview with The Edge during a media visit to MBM’s production plant in Pekan, Pahang, president and CEO Dr Claus Weidner and vice-president of sales and marketing Mark Raine seem unperturbed by the company’s declining profits.

The duo stress that MBM is “here for the long term” and that they do not see any impediment to investing in Malaysia. The investments may hurt profits for now but they could yield good returns in the future, they add.

“Every product has a different life cycle. It is pretty difficult for any business to grow, grow, grow, grow, grow every year in terms of dollar and cents, especially for a cyclical industry like automotive. So, to us, it (our profitability) is perfectly fine,” says Weidner.

Since 2003, he adds, MBM has invested RM1 billion in Malaysia to develop key areas, including production, technology, sales and service, talent training and its distribution and dealership network, in order to cement its position as the top premium brand in the country.

“Investments, especially in production, cannot be recouped overnight. If you put up a dealership that costs, say, RM10 million, you do it not for a year or two, but for 10 to 15 years, before you can reap the fruits,” says Weidner.

Short-term pain, long-term gain

Raine concurs, pointing out that MBM is a long-term focused investor with a long-term strategy in Malaysia as the luxury carmaker firmly believes in the growth potential of the country’s automotive market.

“We are expanding and upgrading our dealerships and after-sales network. All these efforts cost a lot of money but we believe they will pay off eventually. We might have seen a short-term decline in profitability but there will be an upswing in the long run,” he says.

Currently, Raine adds, MBM continues to invest money and resources in future businesses, customer experience initiatives and localisation at its Pekan plant, which made 6,580 vehicles in the first nine months of this year (9M2017).

When pressed on MBM’s declining profits, he says the company’s profitability structure is “fairly complex” due to the time lag effect and seasonality factor.

“When we produce a car locally, we actually import its production kits. For that reason, we might (recognise) profits in one year or another,” he explains.

Germany-listed automotive giant Daimler AG controls 51% of MBM while the remaining 49% is owned by Bursa Malaysia-listed Cycle & Carriage Bintang Bhd (CCB), its largest dealer in the country.

It is worth noting that 59.1% of CCB is held by Singapore-listed Jardine Cycle & Carriage Ltd, which is part of the sprawling empire of British family-owned Asian conglomerate Jardine Matheson Holdings Ltd.

“We don’t need to report profits on an annual basis. Instead, we just pour our profits into Daimler. Therefore, it is not so ultra-transparent that you can say our profitability is good or not (based solely on the bottom line). All I can say is that our profitability is extremely healthy and we are happy about it,” Raine reiterates.

Weidner opines that MBM has to deliver superior customer service and experience to keep customers happy and coming back. “To us, it is not just a numbers game, how many cars we sold or things like that. Retention is one of the key words. It’s not just searching for new customers. In some segments, yes, we might get new customers. But in some segments, we need to make sure that they will come back to us one day,” he says.

In fact, MBM scored the highest on the Customer Satisfaction Index in Asean. It is also a market leader with 2.3% in the first eight months of this year, retaining its top position in the premium vehicle segment.

MBM sold 8,771 vehicles in 9M2017, down 3% year on year but it remains confident that this year’s sales will surpass last year’s record.

“We continue to lead in the premium segment. With our product expansion strategy, launching 13 new models, as well as eight new and upgraded dealerships over the last nine months, we are on track for yet another record year,” says Raine.

The Mercedes-Benz C-Class model topped sales in 9M2017 with 3,044 units, followed closely by the E-Class (1,891), SUV (1,895), compact car (1,220) and S-Class (303). The sales of the Mercedes-Benz Dream Cars, dubbed “brand shapers”, totalled 406 units.

Investing in dealership and production

It is noteworthy that MBM has the largest premium dealership network, with 33 serving customers nationwide. Besides CCB, Hap Seng Star Sdn Bhd — controlled by locally listed Hap Seng Consolidated Bhd — is another major dealer for Mercedes-Benz vehicles in Malaysia. Other authorised dealer partners include Naza Group’s NZ Wheels Sdn Bhd and new entrant Auto Commerz Sdn Bhd.

Auto Commerz is an international dealer backed by Swire Group, a diversified global company that has experience in the retail and distribution of Mercedes-Benz vehicles in Taiwan and will now also be catering for customers in the northeast region of Kuala Lumpur.

As at 9M2017, MBM and its dealerships had invested more than RM90 million in expanding and upgrading the network.

Also, since 2003, MBM has spent more than RM280 million on its Pekan plant, which currently produces 12 variants of locally assembled vehicles, such as the S400 h, GLC 200, C350 e AMG, E200 Avantgarde and C200 Exclusive.

The marque offers more than 50 variants of vehicles, of which 40 are imported.

On Oct 5, MBM introduced its new hybrid model, the Mercedes-Benz E350 e, which comes in two variants — the AMG Line and Exclusive Line.

Raine highlights that the target market for the E350 e are its traditional E-Class customers. “They are predominantly male, older generation, wealthy, affluent individuals, somebody with a corporate background,” he says.

Commenting on the product line-up, Raine says MBM has a perfect portfolio that covers almost every segment in the market but it constantly reviews and adjusts the model variants. “I’m always happy but I’m never happy with our product portfolio. We want to expand it as much as we can. For instance, the SUV is still a developing segment for us and we see great potential there.”

MBM launched 18 new models last year and has unveiled 13 to 14 models so far this year with a few more in the pipeline.

Raine acknowledges that MBM’s strategy is to continuously introduce new variants of vehicles to achieve product-driven growth.

Essentially, he says, MBM has to capture the market by producing what customers really want and analysing the requirements of each customer. “If he wants to have a luxurious limousine, then he is a perfect fit for the E-Class. If he has an active lifestyle and wants to carry a golf bag or bicycle, then maybe a GLE or GLC would be more suitable. If he just wants to have a fun car for the weekend, then it could be an SLC. It is not so much of pushing in one variant. We want to increase our sales in totality,” Raine concludes.

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