Daimler's new China chief inherits a host of headaches

Undated handout pictures shows Mercedes-Benz trucks chief Hubertus Troska. German car and truck maker Daimler announced on December 12, 2012 that Mercedes-Benz trucks chief Hubertus Troska will be appointed to the group's management board effective in January, with responsibility for China.

BEIJING (Reuters) - Daimler AG's (DAIGn.DE) new China chief Hubertus Troska inherits a host of headaches in the world's biggest market: slower sales for its flagship Mercedes-Benz brand, slumping transaction prices and profitability, and dissent from unhappy dealers.

While China has become Mercedes-Benz's No. 3 market globally after Germany and the United States, the luxury unit trails its rivals like BMW and Audi in sales and has slipped deeper into global third place in the luxury market this year.

The German brand's dealer association has been so concerned with performance that its leaders met with Mercedes management in Beijing "multiple times this year to air those complaints", said an executive of a large Mercedes dealer group.

The trouble in China is particularly ill-timed for Mercedes, since European carmakers have been counting on China's growing appetite for luxury cars to make up for sluggish sales in their home markets amid the euro zone economic crisis.

Troska, a 24-year Daimler veteran who used to run Mercedes-Benz truck operations in Europe and Latin America, was appointed earlier this week as an executive board member in charge of Daimler's China operations and head of Daimler Northeast Asia.

His appointment follows Daimler's decision in October to replace another key executive, Klaus Maier, as head of Mercedes-Benz China with the brand's former Japan chief Nicholas Speeks.

HEAVY DISCOUNTS

The management shake-up comes at a taxing time for Daimler in China.

Most worrisome, industry insiders and key operators of Mercedes showrooms say the business has been bogged down by what they describe as a short-sighted volume grab that has taken a toll on the brand's profitability.

Dealers are especially unhappy about Mercedes' aggressive push to boost volume even with heavy discounts.

"we're not making money at all," the dealer group executive said, speaking on condition of anonymity because of fear of upsetting the automaker his company works with. "This year it's been mostly the more we sold the more we lost money."

The executive added, however, that Daimler began responding to the dealers' complaints and started to adjust its market strategies starting around the summer.

"We, as always, are working to justify the confidence of our partners and customers in China and to ensure the continued attractiveness and value of our brand," a Daimler spokeswoman said, when asked to comment on the meetings with dealers and other issues in China.

Troska needs to fix these problems for Mercedes to reap the promise of China, where demand for top-end vehicles is forecast to grow to 2.7 million cars a year by 2020, overtaking the United States as the world's leading luxury car market.

To be sure, falling profitability has not been a problem unique to Mercedes. China's demand for cars, especially for luxury cars from German brands including BMW and Audi (VOWG_p.DE) was red-hot in 2009 and 2010.

That changed when the government canceled key tax and other incentives. Initially, demand slowed for mainstream brands. Then demand for foreign upscale brands began slowing this year.

Still, trying in part to meet their sales objectives, many global luxury car brands pushed on, in some cases asking dealers to take on inventory as planned even as demand slowed.

For Mercedes, the vicious cycle of heavy discounting and the resulting toll on profits began early in the year when it offered relatively hefty discounts on certain trims of the flagship S-class sedan, which is currently being redesigned in Germany.

The new S-class is expected to hit showrooms in China towards the end of next year. According to two Mercedes dealer executives, the company tried to sell as many outgoing S-class cars as possible as the model nears the end of its lifecycle.

At one point over the summer, some Mercedes dealers were giving a nearly 30 percent price discount on the model, which normally retails for 980,000 yuan ($157,200). The car in the heyday of China's auto boom - just a couple of years ago - used to fetch a 50,000 to 100,000 yuan premium over the sticker price, dealers said.

DEMAND WEAKENING

The problem was that just as Mercedes was pushing to sell S-class sedans demand for luxury cars was weakening. As unsold cars began piling up, dealers had to resort to deeper discounts and other incentives to move those cars out of their lots.

What's worse, the S-class car's falling transaction prices triggered a similar slide in those of Mercedes' other models, more or less across its entire product line-up in China, dealers said.

"Dealer profitability started to disappear," one of the executives said. "Everybody was hurting."

To be sure, dealers and industry insiders say Mercedes dealers' complaints did not necessarily fall on deaf ears.

The dealer executives said for the third quarter this year, Daimler agreed to reduce wholesale and retail targets - both about 80,000 cars - by 17 percent and 12 percent respectively.

The move, they said, was an effort to better match production and shipments with demand in order to avoid unnecessary discounts. It was not clear what Mercedes decided for the fourth quarter. A Daimler spokesman declined to comment, saying that the company only makes public annual sales targets.

Daimler also in August decided to merge its two distribution organizations in China - one run by Mercedes and dealer group Lei Shing Hong for cars imported from Germany and the other for cars built locally with Beijing Automotive Industry Holding Co.

The two distributor set-up had long been a source of complaints from dealers about inconsistent marketing strategies.

That confusion was symbolized, according to people familiar with the matter, by a fuss several years ago over the use of two different actresses to promote the brand -- 'Crouching Tiger, Hidden Dragon and 'Memoirs of a Geisha' star Zhang Ziyi was the face of the import business while Li Bingbing represented Chinese-made Mercedes cars.

In November, Mercedes' sales in China fell 6.6 percent to 16,876 vehicles, holding the year-to-date gain to just 4.2 percent to 177,301 vehicles.

By contrast, sales of BMW cars rose 62 percent to 29,005 vehicles last month, extending its 11-month increase to 37 percent, and sales of 274,985, while Audi posted a 26 percent gain in November to a record 37,600 autos, making a 31 percent gain so far to 370,559 vehicles.

Industry experts said the weaker sales at Mercedes in part reflected Daimler's more realistic approach to matching shipments with demand.

(Editing by Alex Richardson)