Once in a while, I like to write articles that get away from narrowly focusing on any one particular stock and explore a segment of an industry instead, as a way to take in the bigger picture within which individual firms operate. I did just that in regards to the fast-expanding EV market, within the auto industry, in an article entitled, “In Age Of EVs, Income-Based Range Inequality Will Become The Norm.” It is an article exploring the lack of suitability for EV technology to provide adequate utility in terms of range to the global middle class income bracket. The inescapable aspect of EV technology is that there is a clear positive correlation between EV prices and driving range.
Source: Seeking Alpha.
I should note that I used estimated break-even prices for the graph above, rather than EV sales prices, which can greatly distort the situation due to current automakers’ willingness to take a loss on EV models they sell. At the same time, we should note from the same data that EVs are increasingly a viable option on the higher end of the auto market with ownership of a Tesla (TSLA) increasingly becoming a social statement of not only affluence but also a moral responsibility.
It is no longer a secret that Tesla is a luxury car maker, not mass market, as it tried to brand itself with the release of the model 3. Daimler’s (OTCPK:DDAIF) (OTCPK:DMLRY) Mercedes luxury brand should take note, because it is the luxury segment that is most threatened by the growing EV trend. To date, Mercedes does not have a single success story in this growing niche segment. If things don’t change within a few years, Daimler may find itself under siege, with sales volumes under significant pressure.
Why it is imperative for luxury brands to compete within the EV segment
After I wrote my introductory article on the subject of EVs and where they belong within the overall auto market, I also wrote my first company-specific article on Volkswagen (OTCPK:VWAGY) (OTCPK:VLKAF), entitled ” Volkswagen’s EV Pivot May Be More Damaging To The Company Than The Diesel Scandal.” As the title suggests, I do not think that Volkswagen’s plans to become an EV maker fit well with its overall identity as a People’s Car as even its name suggests that it is, in other words a brand for the middle class.
While I do think that it should steer its Audi brand in that direction, its Volkswagen, Skoda and other brands meant to cater to the middle class, should continue to provide good quality ICEVs, given that EVs priced in the same range cannot hope to provide equal range utility to consumers. EVs priced in the $15,000-$25,000 range will only provide the utility of a city car, which is a niche market that is incidentally mostly an upper income level trend as well.
The reason why I think that the opposite is the case for Daimler and it needs to become a successful EV manufacturer, is because it is competing for the same consumer segment in terms of income, as the EV market does. In fact, there already seems to be an erosion in terms of Mercedes sales in certain markets, which may in fact be a sign of things to come. After all, success for the likes of Tesla, which sells cars at an average price of about $56,000 in the US has to translate into some displacement for other luxury automakers. Those who opt to buy a model 3 are mostly not doing so as an alternative to buying a Ford Focus (NYSE:F), or a Honda Civic (NYSE:HMC).
Data source: Carsalesbase
I should note that 2019 data for the graph above is for January to July. While the full year results are far from being determined, of note is the fact that the sales ratio is currently holding steady. Currently, Tesla sells one car for every 1.91 cars that Mercedes sells in the US. Last year the ratio was 1.84, therefore Mercedes seems to have maintained its sales superiority ratio relative to Tesla for this year, at least so far. This means that it still has time, but not much.
We should also note that while Tesla sales improved dramatically since the model 3 deliveries started, Mercedes sales have been on a path of slight decline, seemingly coinciding more or less with the surge in Tesla sales. In other words, even as Tesla sells more and more luxury cars, Mercedes sales are starting to take a hit. Even if we are to assume a steadily growing demographic that can afford to buy a luxury car, it goes without saying that EVs are taking a big bite out of ICEV luxury car sales.
In other words, in the absence of EVs, far more luxury vehicles would most likely be sold, including Mercedes cars. We should keep in mind that it is not only Tesla but all EVs that are cutting into those ICEV luxury car sales. The average household income of an EV buyer is currently around $200,000/year, in other words, the same demographic which tends to buy luxury cars, including the many models that Mercedes has to offer. It is becoming increasingly clear therefore that luxury car makers need to compete fiercely for EV market share, unlike car makers that tend to cater to the broader middle class.
Mercedes yet to produce a prominent EV
Whether we look at European EV sales, or US sales, there is not a single Mercedes EV model which managed to distinguish itself in terms of sales rankings in the past few years. For 2019, the first Mercedes car that we meet in the model rankings is the Mercedes GLC 350e, which is in eighteenth spot currently. It is a plug-in hybrid with limited battery range, so nothing to distinguish it. Daimler only has one pure EV, namely the Smart EV model, which offers a very limited range of 57 miles. In Europe, it is much of the same story, with Mercedes missing in action.
The Mercedes EQC will be the first serious EV offer that Daimler came up with so far. With an expected driving range of around 220 miles, it is much of the same as the Audi e-tron. It is basically Tesla model S or X prices, with comparatively inferior range. It still falls short of the range needed to truly match ICE vehicles in terms of range utility. In other words, it would still be a bit of a nuisance to take them on a longer range road trip.
Even in Europe, where perceptions are that one does not need as much driving range on a refill, there are many people who would be occasionally inconvenienced by the need to repeatedly stop and recharge for about 40 minutes, not including the time lost slowing down for off-ramp, speeding up on the on-ramp and so on. I continue to maintain my personal view that a true replacement to an ICEV needs a real driving range of about 300 miles or more, in order to fully provide the utility that one gets from driving a conventional vehicle.
Aside from the fact that it is lacking in terms of range, it is also lacking in terms of offering the dual social statement that a Tesla currently offers simultaneously, namely affluence as well as environmental responsibility. Based on current images and descriptions, the EQC does not exactly distinguish itself apart from a conventional Mercedes, which automatically makes it unappealing, at least for some potential luxury EV buyers. We have no way of knowing to what extent this could be an impediment to consumer demand, but I have a feeling that it is significant.
Everything I have seen in regards to the evolution of the fast-growing but still niche EV market makes me continue to believe that it has very little chance of making significant inroads into the middle class consumer segment, here in the US, in the EU or worldwide. EVs with the kind of minimum range needed to provide the same utility as an ICEV provides are sold mostly to the affluent who can afford to buy a car that costs $50,000 or more and are willing to do so.
Cheaper EVs with far inferior range are also mostly sold to the same demographic as a city car, while most of those same households have at least one alternative they can use whenever the short range offered by the EV is seen as inconvenient. The Nissan Leaf (OTCPK:NSANY) for instance is typically purchased by a demographic with a median household income of $124,000. That is a demographic segment which tends to buy some of the lower-priced Mercedes models. In fact, it is almost identical to the average income of BMW (OTCPK:BMWYY) buyers.
I could not find any data on the exact average income of a Mercedes buyer, but I think it should be more or less in the same ballpark. The typical Ford Focus buyer for instance has an average household income of $63,000, therefore I doubt that Ford has to worry about losing its Focus customers to EVs. Daimler does have to worry, and the only solution is to build up its own EV portfolio, so it does not lose its customer base to other car makers. While I see no danger on the horizon for the likes of Ford or Volkswagen to lose conventional business to EVs, the luxury car brands will most likely have to either convert or face extinction, and it may come sooner than most might think, because I see no barrier to EVs dominating the luxury car segment. Daimler may only have a few years to adapt, or face a bleak future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.