Mercedes Attacks BMW From Hungary With Europe’s Last Plant: Cars

Mercedes Attacks BMW From Hungary With Europe’s Last Plant
Employees work on the assembly of Mercedes B-class automobiles on the production line in Daimler AG's new Mercedes-Benz factory in Kecskemet. Photographer: Akos Stiller/Bloomberg

Daimler AG’s Mercedes-Benz kicked off its assault on Bayerische Motoren Werke AG’s luxury-car sales lead on the plains of Hungary.

An 800 million-euro ($1.07 billion) factory, located in Kecskemet about 90 kilometers (56 miles) southeast of Budapest, began production of the Mercedes B-Class compact today, 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 600 million-euro 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 6 billion euros by 2017 to offset rising raw material costs and increased spending to lower carbon-dioxide emissions of its vehicles, the company said today.

Daimler dropped as much as 1.37 euros, or 3 percent, to 44.42 euros and was down 2.5 percent as of 2:55 p.m. in Frankfurt trading. 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 48.1 billion euros. BMW stock has gained 51 percent over the same period, giving the world’s largest maker of a luxury autos a market capitalization of 42.4 billion euros.

‘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 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. said it will stop making cars at its factory in the Netherlands after failing to come up with a plan to maintain production.

Housing Shortage

With that backdrop, Kecskemet is thanking its lucky stars that it was selected as the site of the Mercedes factory.

“We’re the envy of the region,” said Klaudia Pataki, deputy mayor of the city of about 110,000 people on the sandy plains of southern Hungary. “This investment has definitely changed the strategy and image of the city for at least 50 years.”

The influx of more than 2,500 jobs at the plant and more from parts suppliers has led to a housing shortage, which should spark a building boom, Pataki said. That’s a stark contrast to the rest of Hungary, where the number of homes built last year fell 39 percent from 2010, deeper than slumps between the two World Wars and at the beginning of the Communist era, according to the country’s statistics office.

Frozen Funds

Hungary, the most indebted nation among the European Union’s eastern members, is struggling to narrow its budget deficit, which has overshot the bloc’s shortfall limit since the country joined in 2004. The EU partially froze Hungary’s infrastructure-development aid for 2013, giving it until June 22 to take action to cut the deficit.

Hungarian Prime Minister Viktor Orban, who attended the plant’s opening ceremony today, is embroiled in a legal dispute with the EU over the independence of the central bank and the courts. The dispute has blocked financial aid negotiations with the International Monetary Fund and the EU. The economy is set to contract 0.6 percent this year following an expansion of 1.7 percent in 2011, according to the Organization for Economic Cooperation and Development.

Mercedes is following Audi, which has manufactured motors in the western Hungarian city of Gyor since 1993. Audi began building the 30,500-euro TT coupe there in 1998 and is investing 900 million euros to expand annual capacity to 125,000 cars by next year from 38,500 in 2010.

Cheaper Labor

Hungary’s attraction is an educated labor force that last year cost 8.61 euros an hour compared with 45.66 euros in Germany, according to data from German auto industry group VDA. With about 40 working hours spent to assemble Mercedes vehicles, the savings are equivalent to about 1,480 euros per car, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.

Daimler said today that it aims to reduce the average hours spent assembling a vehicle to 30. In Hungary, the low cost of labor in Hungary meant fewer robots in areas of the plant, such as the paintshop, said Bernhard.

Cheaper production costs should help Mercedes boost profit on the vehicles. The Daimler car unit intends to lift its operating profit margin to at least 10 percent of sales in 2013 from 9 percent last year.

“Adding capacity in the premium segment makes sense, as car buyers are either moving upmarket or heading downmarket,” said Michael Tyndall, a London-based auto analyst with Barclays. “The problem for the mass-market carmakers is they expanded into Eastern and Central Europe without closing western factories, so they’ve created their own problem to an extent.”

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