Mercedes product plans keeping internal combustion around longer

Mercedes-Benz is gearing up for a near-record slew of new models after its first generation of battery-powered cars fell short.

The product offensive over the next two to three years will also see the S-Class maker pivot to spending more on its lucrative lineup of fuel-burning vehicles. Top-level buyers, in particular, “keep reaching for our high-tech combustion-engine cars,” Chief Executive Officer Ola Källenius said in an interview. 

“We need flexibility for longer, until deep into the 2030s,” Källenius said, keeping intact the company’s goal of being carbon-neutral by 2039. “We remain committed to offering electric versions of the entire lineup this decade, but we have to ensure our combustion-engine cars remain competitive.”

The preeminent luxury-car maker has pared back electrification plans in recent months as EV demand has slowed. But Mercedes also has trailed archrival BMW because its lineup of electric models has put off buyers with high prices and polarizing designs. The company’s battery-vehicle sales fell 9% during the first quarter to 50,500 units, while its Munich-based competitor’s deliveries surged to 82,700 vehicles.

The EQS — billed as one of the most significant launches in decades when Mercedes introduced it in 2021 — has particularly fallen short, drawing unflattering comparisons to a jellybean amid low sales. The six-figure sedan’s sloping roof maximized aerodynamics but cramped some rear-seat customers — a problem in China, where many car owners are driven by chauffeurs. Customers in that market also missed status-symbol details like Mercedes’ characteristic three-pointed star hood ornament.

The sales flop contributed to Mercedes’ decision to walk back its goal to sell only EVs where possible by 2030. Its new target is for roughly half of sales to be electric by then. Competitors including Audi and Jaguar Land Rover similarly have adjusted as even EV leader Tesla struggles with slumping deliveries.

Tepid demand also has triggered costly design upgrades, with Mercedes preparing a face-lifted EQS for next year with more back-seat comforts and the star returning to the hood. During the first quarter, higher spending on what the company dubbed “lifecycle management” partly dragged on returns, which fell to 9% from 14.5% a year earlier.

Mercedes will kick off its next generation of vehicles built on new underpinnings next year, starting with the entry-level CLA coupe and later the GLB SUV. During a preview of the upcoming suite of cars at the company’s design center in Sindelfingen, southern Germany, Källenius was keen to demonstrate sufficient roominess in even the smaller models, squeezing his tall frame into the back seats. 

The automaker also plans to bring out a compact electric version of the G-Wagon in 2026.

The CLA will be available in battery-powered and combustion-engine versions. At the time of launch, the model is set to head the current portfolio on some driver-assistance systems and computing power, Källenius said in Sindelfingen.

While combustion-engine cars will generate superior profits for longer, the Stuttgart-based company is continuing to push for savings in purchasing, fixed costs and non-essential spending, Källenius said. 

Mercedes may also potentially free up as much as €10.5 billion by selling its remaining stake in Daimler Truck, which was spun off in 2021. The lockup period for the carmaker’s remaining 35% holding expires at the end of the year.

“The stake represents an additional reserve in addition to our net industrial liquidity,” Källenius said. No decision has been made, and the carmaker is “fully focused on the needs of the Mercedes customer,” he said.

Daimler Truck rose as much as 2.9% Monday in Frankfurt. Since trading separately from Mercedes, the world’s biggest commercial-vehicle maker’s stock has risen 38%, boosting its market valuation to €31 billion. Mercedes shares also advanced as much as 2% in intraday trading.

Mercedes is conserving some spending by putting two of three European battery plants slated to emerge from a €7 billion joint venture on hold. Automotive Cells Company, co-owned with Stellantis and TotalEnergies, has paused work in Germany and Italy to consider pivoting to lower-cost cells in light of slowing EV demand.

“We will build battery cell plants at the speed with which we’ll need them,” Källenius said. “We have to match capital allocation to the rate of adoption.”

The shift to EVs is also being challenged by geopolitical tensions. The European Union is set to formalize provisional tariffs on China-made battery cars this week, with duties rising to as much as 48%. Should the charges go ahead, Smart models made by a Mercedes-Geely joint venture in China will attract a 20% tariff on top of the existing 10%, Källenius said.

“When you have benefited from open markets as Germany has for decades, it doesn’t make sense to possibly trigger a trade conflict,” he said. “We manufacture the Smart in China with our partner Geely and are thus importing cars to Europe at a significant scale.”