Daimler Makes a Profit! A Reason for Joy?

Mercedes Type 170 H - 1937

Daimler made a profit of €3.6 billion in 2020, €1.2 billion, almost fifty percent more than in 2019. After deducting minority interests, that’s even a profit of four billion. And that’s despite the crisis year 2020 and a resulting slump in revenue, which fell by eleven percent to €154 billion compared to 2019. At 2.8 million, vehicle sales were also 15 percent below the previous year’s level. As a result, the dividend is also lavish, namely€1.4 billion, €1.35 per share, 45 cents more than in 2019, is now to be distributed to shareholders.

Peace and happiness at Daimler? The questions we should be asking ourselves are:

  1. How did Daimler manage to generate this increase in profits in the crisis year 2020 despite sales losses?
  2. To what extent did this affect the remuneration of the Board of Management?
  3. What are the short- and medium- or long-term effects on the company?

Ad 1: Still in the 2nd quarter Daimler wrote a loss of two billion euros, only to be in the deep black again in the 3rd quarter with €3.07 billion. In the meantime, plants had been closed (Hambach) and 30,000 employees worldwide had been laid off. We still don’t know the exact figures, but in addition to these cost savings, other investments have probably also been cut back. Typical examples are those in research and development, which very quickly have a profit-increasing effect.

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Ad 2: This gain had a positive impact on the Daimler Board of Management. CEO Ola Källenius was able to increase his previous year’s salary from 3.5 million to 5.9 million euros in 2020, and the other members of the Board of Management also received an average of 3 million euros per head. Remuneration for the entire board will come to 26.7 million in 2020 by 3.6 million euros more than in 2019. The share price from just under $13 at the start of 2020 fell to below six dollars at the beginning of March at the start of the lockdowns, only to exceed as much as $20 in February 2021. A 50 percent increase since the beginning of 2020.

The salary of members of the Board of Management is usually linked to the company’s profit and the share price. And this always explains certain measures. In a study by three economists, Alex Edmans, Vivian Fang and Katharina Lewellen, it was found that managers unusually often cut their R&D spending in a quarter when they can sell a large number of stock options. Since vesting periods for stock are set years in advance, this seems to be prima facie evidence that managers cut intangible investments to improve earnings and give their stock price a boost when it matters most to them (see also the book Capitalism without Capital).

Ad 3: The measures taken (plant closures, job cuts, savings) lead to short-term jumps in profits and thus also in share prices. This has a positive effect on salaries and possible stock options, as well as on dividend payouts, for an Executive Board that is usually appointed for four years. However, these specific measures are only possible to a limited extent. A golden handshake, in which primarily those colleagues – not yet eligible for retirement – who have the greatest chance of finding employment with other companies leave, means that the greatest talent is the first to leave the company. Savings in R&D are more or less an investment debt that you take on, which you will then miss later if you don’t correct it as quickly as possible. Especially at a time when a major upheaval is taking place, as is currently the case with electric cars and autonomous driving, any investment reversal can lead to a disproportionate technology backlog.

Furthermore, 30 percent of the annual profit is distributed to shareholders as a dividend. In view of the massive investment requirements and in comparison to the share price developments and thus the financing possibilities of new competitors such as Tesla, BYD or NIO, this dividend distribution seems inappropriate. The financing of these new technologies are so expensive that it will be difficult for Daimler to handle them on its own. And Daimler is far behind, as can be seen, for example, from the 2020 Disengagement Report in autonomous driving and with an eight-year backlog in electric cars, where a competitive premium electric vehicle is not due to be launched until the fall of 2021 with the EQS.

In view of these aspects, I fear that in the medium and long term there is no reason to be happy about this year’s profit. It could mean that Daimler once again wanted to dress itself up for a buyer with a good result, in view of the announced company split into Daimler Trucks and the passenger car division Mercedes Benz. It could have been one of the last profits for Daimler as an independent company.


BTW: The Mercedes-Beetle as article image is real. I took that picture at the Cité de l’Automobile in Mulhouse in France, also known as Collection Schlumpf. Here is the description from the museum website:

There’s no coincidence about the resemblance this vehicle bears to the VW Beetle. Both were designed by Ferdinand Porsche, who had worked on a small rear-engined automobile during his time with Mercedes in 1933.
Three successive versions were sold by Mercedes from 1934 onwards, and this is an example of the third version.
This car is a rear-wheel drive, with a four-cylinder water-cooled engine with lateral valves, an idea that was taken up after the war by Renault on its famous 4 CV. This car nevertheless had a big failing. Its rear engine and X-shaped chassis platform gave it very poor handling. Only 1500 units were produced. Since most of them were destroyed during the war, this example is rare these days.

Ferdinand Porsche left Mercedes to found his own design firm. In 1938, he designed a rear-engined, air-cooled motorcar that the Nazi regime decided to put into series-production, with the name ‘Volkswagen’, the people’s car. It came to be known as the Beetle, and still holds two outright records – over 24 million units were produced over more than 60 years.

This article was also posted in German.

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