Mercedes EVs Catch Fire while Company Presses on with BEV Expansion
Analysis shows Mercedes-Benz's BEV sales dropping while recalls rise
On the 1st of August, a Mercedes-Benz EQE Battery Electric Vehicle (BEV) — equipped with a battery pack made by China-based Farasis Energy — burst into flames early in the morning in an apartment complex in Incheon (Republic of Korea), injuring 21 people. Lithium batteries on fire tend to be notoriously hard to extinguish and this isn’t the first time either: a Singapore-registered EQB350 BEV caught fire while charging at a dealership in Johor Bahru, Malaysia on New Year’s Eve 2023 — followed by yet another Mercedes-Benz BEV gong up in flames in Pahang, Malaysia almost exactly a week later.
Nor was it only in Asia that Mercedes BEVs have caught fire or was it necessarily while being charged: in July last year, an EQB350+ sedan (which retails for about $75,000 in the U.S.) caught fire while parked in the garage attached to a home in an upscale neighbourhood in Nocatee, Florida for almost an entire day. In the month prior, i.e. June, the U.S.’ National Highway Traffic Safety Administration (NHTSA) and the company jointly issued a voluntary recall for over 15,000 Mercedes-AMG EQE, Mercedes-AMG EQE SUV, Mercedes-AMG EQS, Mercedes-Benz EQE, EQE SUV, EQS, EQS SUV and Mercedes-Maybach EQS SUVs from the 2023 model year or newer following issues with the battery management software which could potentially shut down the battery while the vehicle is in motion.
What’s particular about high-end BEVs, which include the likes of Mercedes-Benz and even Tesla, is that even slight damage to the undercarriage could be hazardous due to the battery pack therein and would ideally merit a visit by the owner to the dealership for further inspection. A hint for why vehicles might be catching fire while parked or charging might lie in a recall order issued in May this year by NHTSA for 2,209 Kia Nero BEVs manufactured between July 21, 2021, and December 2, 2021. Kia reported that the root cause hasn’t been determined yet but that a supplier deviation in the manufacturing of the safety plug’s female-to-female terminal is suspected. The contact surfaces may develop high electrical resistance over time, which may cause the connector to melt during charging or driving. Until the parts were replaced, Kia Motors advised Niro owners to not charge their BEVs within “closed structures”. Given that many carmakers — both high-end and budget — usually tend to share the same select number of component suppliers, with some part of their supply chain embedded in China or even South Korea. If the supplier’s manufacturing process has faults, said faults would manifest in multiple carmaker models.
Mercedes-Benz, like many Western luxury car brands, have done particularly well in Korea this year and by no means is this a recent trend. Overall perceptions line up well with global attitudes and doesn’t show any curious outliers like with Japan, wherein Mercedes-Benz cars have traditionally been associated with the Yakuza. Over the past couple of years, the company has been making a massive push into “electrified vehicle” — which are both BEVs and Plugin Hybrid Electric Vehicles (PHEVs).
The company’s recent Q2 results was estimated to have missed analyst estimates by 1.1% while Earnings Per Share (EPS) exceeded estimates by 3.6%. EPS is generally a strong indicator of operational success and investment value accruals. However, despite that, the stock has been indicating bearish trends since then.
The reason why lies in the breakdown of trends in key line items as well as vehicle deliveries, with its BEV offerings being particularly impacted after two years of heavy sales in 2023.
Trend Analysis
After a massive reorganization wherein the company’s historic commercial vehicles division was spun off in 2021, the company’s line items have been modified and flow differently. Full-year trends since 2021 as well the company's performance in the first half (H1) of the year relative to 2023’s performance reveal a decidedly mixed picture in 2024 so far:
In terms of unit sales, the company’s car offerings witnessed a modest bump in 2022 following which sales volumes were flat overall in 2023. In 2023, sales of its high-margin “Top-End” models ran flat while its lower-margin “Entry” models — led by its A-Class and B-Class catalogue which retail in the $30,000-$60,000 range in the U.S. — witnessed a slight bump following a slide in the previous year. “Electrified vehicles”, which constituted slightly fewer than 20% of all cars sold, carried forward strong trends in their total share within total volumes in 2023. BEVs formed 12% of the total share while PHEV sales shrunk. The company’s van offerings were quite strong and had a definite role to play in the year's revenue performance over the prior year.
In H1 2024, total car volumes sold are currently running under par, with “Entry” models running well below previous year's trends and volumes largely boosted by mid-margin “Core” models, which are led by its E-Class, C-Class, GLE and GLC catalogue which retail in the $50,000-$70,000 range. The total share of “electrified vehicles” within total volumes sold has dipped, with PHEVs staging a comeback and running almost neck-and-neck with BEVs in relative share. Van volumes are running under par and the sales of “electrified vans” (which are all BEVs) are poised to underperform significantly.
In financial trends, cars are significantly underperforming in H1 relative to the previous year's Earnings Before Interest and Taxes (EBIT) with the “Mobility” segment being a relatively distant second in EBIT performance. Vans, despite their relatively modest volumes, benefit from a wider price range in offerings and well-established synergy with the “Mobility” segment (since fleet vehicle purchases typically tend to be financed). However, vans lead cars in spending on Research and Development (R&D) as the company continues to build out its scalable “Van.EA” architecture for future launches of electrified van models, which will likely be of interest to fleet operators when it comes to fruition.
Note: There would be a fair amount of reconciliation between segment items, given the strong relevance of the "Mobility" segment towards promoting sales of vehicles, be they vans or cars. The true effect of reconciliation exercises would be more perceptible in the annual report.
Industry Outlook and Market Performance
While the company states being resolute in its focused on developing a strong offering in “electrified vehicles” — with BEVs being a strong area of interest — consumer appetites seem somewhat sated and even over-catered for BEVs in the year so far. Sales trends for BEVs are showing early signs of downtrends while sales of hybrids (both Hybrid Electric Vehicles and PHEVs) have seen uptrends in a number of carmakers’ reports. This trend is manifest in Mercedes-Benz’s performance in the year so far as well. What particularly impacts the company’s efforts to continue BEV sales might be attributable to recent events involving a string of high-end BEVs spontaneously combusting away all around the world.
With expenses expected to continue in the development of BEVs outside of the cost of rectifying faulty supplier-made components, there is an expectation that earnings might not be as healthy going forward. In fact, the company lowered its expectation for margins for the car division in the course of the earnings release.
Relative to the broad-market S&P 500 and the “tech-heavy” Nasdaq-100, the company’s European ticker did outperform both from around the time of the annual report’s release till the first quarter’s earnings. Subsequent to that, the stock lagged until it is now a significant underperformer in Year Till Date (YTD) terms relative to both indices.
Incidentally, market participants in the U.S. show a slight difference in outlook from European investors, as evidenced by the fact that the European ticker tends to perform slightly better for the most part than the stock's American Depositary Receipts (ADRs) — outside of some points of strong outperformance.
In Conclusion
At this point in time, the company has been in operation for almost a century with a long history of operational excellence and innovation. While it isn't likely that this company will face significant reverses, it seems somewhat more likely that the rationalization of its expenditure for developing “electrified vehicles” will be spread out over a longer time period. As of right now, the company has a major release — an all-electric version of its popular Sprinter van is scheduled to begin deliveries in the second half (H2) of this year. If all goes well with fleet operator demands, the year's revenue will likely be buoyed yet again by the van division.
All in all, this might be an interesting moment for investors not currently holding the stock to consider it for both tactical strategies and even long-term inclusion.
Note: An analysis of Mercedes-Benz’s recent earnings was also published in articles on SeekingAlpha as well as on the Leverage Shares website.
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