Mercedes Revamps The S-Class To Lure China's Wealthy Buyers: Dorothee Tschampa Alexandra Ho Christoph Rauwald

Mercedes Revamps the S-Class to Lure China's Wealthy
Buyers
By Dorothee Tschampa,Alexandra Ho, andChristoph Rauwald
Daimler (DAI) Chief Executive Officer Dieter Zetsche was leaning back in the rear seat
of a prototype Mercedes-Benz S-Class sedan in 2010 when he realized it didn’t recline
far enough. With wealthy consumers accustomed to sumptuous airline seats, he figured
Mercedes needed to approach that level of comfort in its flagship model. “Engineers
traditionally focus on the driver seat position,” Zetsche says. But “S-Class owners often
experience their car from ‘the second row,’ especially in China,” where luxury cars are
frequently driven by chauffeurs.
So Zetsche had his designers create a back seat that reclines to a 43.5-degree angle,
available as an option on extended-wheelbase versions of the revamped S-Class unveiled
on May 15. For back-seat sleeping, the front passenger seat slides forward to add
legroom and the backrest recedes into a recess illuminated by ambient lighting. A calf
support swivels forward and a heel rest pulls out of the front seat. A hot-stone-massage
function in the back part of the rear seat aids relaxation on long drives. There’s even a
special air bag to prevent slumbering passengers from sliding under the seat belt during
an accident.
Back-seat amenities are critical to reviving the Mercedes brand among well-heeled
Chinese buyers, who account for more than half of all S-Class sales worldwide, and those
sales are key for Daimler’s bottom line. In the first quarter, Mercedes’s operating profit
margin was 3.3 percent vs. 11.1 percent at Audi (VOW) and 9.9 percent at BMW (BMW).
Commerzbank estimates the profit margin on the S-Class at 25 percent (vs. 1 percent for
the A-Class hatchback), so boosting its sales would have an outsize impact on
Mercedes’s earnings.
McKinsey forecasts sales growth of upscale vehicles in China will average 12 percent a
year through 2020, outpacing the 8 percent rate for the country’s overall car market.
That increase would put sales of high-end autos there ahead of those in the U.S. by 2016
and on par with demand for all of Western Europe by the end of the decade, the
consultant said in a March report. Mercedes lost its long-held rank as the No. 1 global
luxury brand in 2005. “Mercedes can only become No. 1 [again] if they improve in the
biggest market—China,” says Thomas Schiller, an automotive partner at consulting firm
Deloitte in Munich. “The S-Class serves as a brand ambassador.”
Zetsche in 2011 announced a goal of overtaking BMW and Volkswagen’s Audi luxury
brand in global sales and profit by the end of the decade. But 2013 Mercedes deliveries—
441,500 vehicles through April—trail Audi by 61,500 and No. 1 BMW by 70,500.
The S-Class has been the clear leader in luxury sedans since it first hit the market in
1972. The halo effect from the car—which can cost as much as $486,000 in China, due
to heavy import levies—also allows Mercedes to generally charge more than rivals for its
other cars. “The S-Class stands for luxury, prestige, comfort, and safety,” says August
Joas, head of the global automotive practice at consultant Oliver Wyman in Munich.
“It’s the absolute flagship model, and a thorn in the flesh of the competition in terms of
volume, pricing, and margin.”
That leadership position isn’t unassailable. Last year, Mercedes sold 80,300 S-Class
vehicles globally vs. 59,200 for the BMW 7 Series and 38,600 for Audi’s A8. In 2008, S-
Class sales were more than double those of the 7 Series and more than four times those
of the A8.
One reason for the falloff was Mercedes’s decision in 2006 to maintain separate China
sales organizations for locally made vehicles, such as the smaller C-Class sedan, and
imported cars like the S-Class. That pitted Mercedes models against one another and led
to price-cutting: S-Class discounts shot up to an unprecedented 25 percent in 2012.
Daimler finished recombining its sales operations this year; in February, Nicholas
Speeks, CEO of Mercedes-Benz China, lashed out at the brand’s Chinese dealers for
missing already-lowered sales targets. “These sales figures can be reached by call-center
employees,” Speeks wrote in a February letter to dealers that was obtained by
Bloomberg. He accused the brand’s sales partners in China of “slack work and a neglect
in the ambition to develop the Mercedes-Benz brand.”
That tough talk drew a chilly reception from Chinese dealers. “Automakers can’t act like
they have all the power,” says Shen Rong, deputy secretary general of the China Auto
Dealers Association. With all brands looking to expand, “it’s now a buyer’s market in
China, so to succeed it’s crucial to handle dealer relationships well.”
Mercedes’s bigger focus is wooing more well-heeled mainland customers. The brand’s
dealer in Shanghai offers perks like a 13-seat movie theater, a cigar room, and an in-
house tea artist. Mercedes also offers some features that are extra-cost options
elsewhere in the world as standard equipment on S-Class cars sold in China. These
include active parking assist technology, a night-vision package, and—surprise—a rear-
seat entertainment system.
The bottom line: Wealthy Chinese buyers account for more than half of all sales of
Mercedes S-Class cars, which can cost almost $500,000 after levies there.

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