Daimler Doubles Spending to Revamp Mercedes-Benz Compacts

Daimler AG (DAI), the maker of Mercedes- Benz cars and trucks, is doubling investment at its plant in Rastatt, Germany, to build sportier compact cars in an effort to overtake top-ranked Bayerische Motoren Werke AG. (BMW)

Spending to convert the factory to build the vehicles, including retooled A-Class and B-Class models, will amount to 1.2 billion euros ($1.46 billion) by the end of 2013, Chief Executive Officer Dieter Zetsche said today at a press conference at the plant. The cars will be “our sharpest weapons” in the drive for industry leadership, he said.

A new, youth-oriented version of the A-Class car is scheduled to reach showrooms in September to compete with the 1- Series made by BMW, the world’s biggest manufacturer of luxury vehicles, and the A3 built by Volkswagen AG (VOW)’s Audi unit. The Mercedes-Benz Cars division, which also includes the two-seat Smart brand, has a target of raising operating profit in 2013 to at least 10 percent of sales from 9 percent in 2011.

“The A- and B-Class haven’t produced enough volume so far to fulfill the margin targets,” Tim Schuldt, a Frankfurt-based analyst at Equinet AG, said today by phone. “Only if the segment grows will the unit costs decline and make the cars more profitable.”

New SUV

The company has received more than 40,000 orders for the new A-Class since mid-June, Zetsche said. The model replaces a version that Stuttgart, Germany-based Daimler has been selling since 2004. The Rastatt site already makes the van-like B-Class and will start producing a compact sport-utility vehicle at the end of 2013, Zetsche said.

Mercedes-Benz ranks third behind BMW and Audi in worldwide luxury-car sales. Combined deliveries of the A- and B-Class models last year totaled 192,000 vehicles, a 14 percent drop from 2010 figures, versus a 20 percent sales gain for the C- Class sedan and its variants to 412,000 cars.

The company is registering “globally good demand” for its model range, Zetsche said. Mercedes-Benz wants 50 percent of A- Class buyers to be new to the brand, he said, reiterating a strategy outlined in April.

The western European car market is likely to decline 5 percent this year to the lowest volume level since 1993, Zetsche said. Daimler’s share of industry sales in the region increased in the first half of the year, he said.

Temporary Workforce

Daimler will hire 500 workers at Rastatt this year, add a third shift and raise the proportion of temporary employees in the factory to 15 percent. That’s almost double the 8 percent generally allowed under Daimler’s labor agreements. About 300 of new employees at Rastatt will be temporary workers who will get permanent contracts, said Peter Wesp, head of the factory.

The factory, where spending from now through 2013 will total 600 million euros, needs another three months before production start up for the new A-Class is completed. Rastatt currently employs 6,200 people according to Wesp.

“We’ve looked under every stone in Rastatt to meet the demands of the global competition,” Wesp said.

The plant already makes a new version of the B-Class, which is also being built at a factory in Hungary. Daimler also plans local production in China of three vehicles of the Mercedes-Benz compact model line-up, which will total at least five vehicles.

Production Improvements

Manufacturing improvements for the new A-Class include a new floor layout for the model that allows the use of engines from other Mercedes-Benz cars and enables the production of flatter, sportier vehicles.

“We have made considerable productivity gains from the old to the new generation,” Wolfgang Bernhard, head of production, said at the press conference, without giving details.

First-half sales by the Mercedes-Benz brand rose 6.9 percent from a year earlier to 652,924 cars. That compares to 733,250 vehicles sold by Volkswagen’s Audi brand, a 12 percent gain. BMW’s namesake brand defended its luxury-car leadership by boosting sales 8.3 percent to 747,064 cars.

Zetsche aims to beat BMW in sales by 2020 and reclaim the luxury-car lead that Daimler lost in 2005. Audi is also working to take the No. 1 position by the end of the decade. Targets at Mercedes-Benz include 1.6 million car and SUV deliveries in 2015 and savings of 6 billion euros by 2017.

To contact the reporter on this story: Dorothee Tschampa in Rastatt, Germany, via dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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