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Morningstar | Daimler's Mercedes-Benz Is a World Leader in Luxury Automobiles

Daimler's highly regarded Mercedes-Benz brand is one of the top luxury automobile names in the world, while Freightliner is the leading Class 6-8 truck brand in the United States. Daimler holds a 15% stake in Russian truck maker Kamaz, makes ultrasmall Smart cars, and is a European leader in buses and vans.Despite reputable luxury car and heavy truck brands, Daimler faces stiff competition in all of its markets. The company operates in a cyclical, capital-intensive industry where raw material commodity costs can be volatile and unionized labor can be expensive. Consequently, economic profitability has not been consistent.Geographically diverse sales reduce exposure to the economic conditions of any one region. Even so, premium brands such as Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers' spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes' addressable market, faster than the 1%-3% rate we estimate for long-term global light-vehicle demand growth.New product is critical to spurring consumer interest and can help results even in an economic downturn. Mercedes-Benz launches new or significantly refreshed models in various markets around the world every year. Research and development spending is substantial, averaging roughly 5% of sales, which we view as a necessary part of a long-term strategy. Environmental legislation worldwide will force automakers to design vehicles with more efficient combustion engines and electrified powertrains. While development costs are high, Daimler needs leading technologies--lithium-ion batteries for hybrid and electric cars--to preserve its reputation as an innovator.We think Mercedes has the potential to be one of the most profitable automakers. However, this potential is limited by stiff competition from global luxury players. Even though capital intensity, competition, and cyclicality are high for automobile manufacturers, these negatives are more pronounced for commercial truck makers, constraining Daimler's potential to acquire an economic moat.