Daimler's Källenius overseeing EV push, cost cuts

Ola Källenius, the first non-German CEO of Daimler and its Mercedes-Benz brand, has been tested by a range of unforeseen challenges, from the coronavirus pandemic to the global semiconductor shortage, during his first two years in charge. Källenius, 51, a native of Sweden, also has presided over the launch of Mercedes' first electric vehicle in the luxury class, the EQS, and is pushing the automaker further into the digital realm with plans to digitalize the entire sales and distribution network. At the same time, he is aiming to lower the company's break-even point, trim fixed costs and broaden Daimler's lineup and customer base. He discussed these topics and more with Automotive News Europe Associate Publisher and Editor Luca Ciferri and Correspondent Nathan Eddy. Here are edited excerpts.

Q: Since taking over from Dieter Zetsche in 2019, you have undertaken a radical overhaul of Daimler. Where do you stand in this process?

A: The transformation of the auto industry is obviously picking up speed. Every type of technological trend is driving this transformation. That includes the move toward zero-emissions vehicles and the car turning into a supercomputer with a very sophisticated software architecture that is fully connected with everything. In both these dimensions, we are significantly increasing our base of development.

On the electrification side, this is an important year for us. We are launching four electric cars. With the EQS, we are launching a vehicle on the first fully dedicated large EV platform in the U.S. The transformation is going to continue and increase in intensity over the next few years.

What we have also been working on, during the last 18 to 24 months, is to improve the company's financial performance. That includes lowering our break-even point and trimming our fixed costs to be able to fund this significant technological shift. But when it comes to where we are in this process, I will use a term from American football: We are only in the first quarter of this transformation.

Could you share what your breakeven point was before and what it is now?

It is difficult to give an exact number because it is so dependent on the model mix and the market circumstances during any specific year.

However, in general financial market terms, we stand by what we forecast in our capital markets day last October. At that time, we showed three scenarios: rainy, partly cloudy and sunny. In rainy conditions — a year where the market is down significantly — we still want to be able to make a single mid- to high-digit percentage return on sales.

Partly cloudy is a profit margin of 8 to 10 percent, which has been our traditional target range. Under sunny market conditions, we want the margin to be in the double digits. The key is this: If your break-even point is too high under rainy conditions, you could end up in a "loss" situation. The last time we lost money was during the global financial crisis in 2009.

In 2020, despite the sharp drop in the market during the first couple of months due to the corona shutdowns, we still had reasonably healthy profitability, even though we ended the year with relatively low volume. Our cash flow in 2020 was also quite healthy. That shows the positive effects of the measures we took ahead of and during the pandemic.

What's your prediction for 2021: Will it be partly cloudy or sunny?

This year will be partly cloudy. This isn't because we don't have the demand. We have tremendous demand and a very strong product portfolio. Like many automakers, we are held back by the shortage of semiconductors. This will prevent us from realizing our full market potential this year.

What is your outlook for next year?

I think 2022 could be even stronger than 2021, but making predictions is always difficult. While there are a lot of unknown external factors, vehicle demand is likely to grow in the second half of this year and that trend is expected to continue into 2022. In our particular case, the fresh portfolio we have today because of the number of products that we are launching should result in a strong 2021 for us, and that should continue in 2022.

There have been reports that Mercedes plans to exit the compact segment. What is your plan for this part of the market?

Over the last two generations, our compact vehicles have been phenomenally successful at broadening our lineup and growing Mercedes' customer base. They have also been financially successful in terms of lifting the overall scale for our brand.

Therefore, we are not exiting that segment per se, because there are many positions in our compact portfolio that generate healthy profitability. What we will not do is go down and start competing with the volume automakers.

Instead, we will carefully choose the portfolio positions in that segment that offer the highest contribution reward and are the most representative of the Mercedes brand promise.

That's what I mean when I speak about profitable growth, not growth at all costs. So, we will continue to compete in the upper end of the compact segments that we are in. We are not exiting those segments.

There was strong demand for electric vehicles in Europe during the first quarter. Did Mercedes' full-electric EQ subbrand benefit, and are you on track to hit your 2021 sales target in Europe?

We are absolutely on track, not just in Europe but around the world. When we started talking about our EV plans in 2019 and how we would meet our CO2 target in Europe, many people were skeptical. However, quarter by quarter, our 2020 EV sales increased quite significantly, especially in the fourth quarter. Therefore, we expect to meet the CO2 targets for Europe for 2020. The strong performance from Q4 2020 has carried over into the first quarter of 2021 as we further strengthen our lineup by launching more EQ vehicles. Second-half sales will exceed our volumes in the first half.

What percentage of your global sales will be EQ models and what percentage will be plug-in hybrid?

In 2020, our xEVs — plug-in hybrids and full-electric models — accounted for a single-digit percentage of our global sales. In the first quarter of this year, we were at about 10 percent globally and 25 percent in Europe. In volumes, xEVs in the quarter were about 59,000 units, of which 16,000 were pure electric.

Have you set a date for when Mercedes will stop making models with internal combustion engines?

We have not set an official date. What we have said is that we want to be CO2-neutral by 2039, which is 10 years ahead of the Paris Agreement. This commitment is not one-dimensional, focused only on product.

We are talking about the supply chain and our own production. About three-quarters of our supply base have committed to join us on this path.

We have created tremendous momentum toward making our complete value chain CO2-neutral by 2039, so I'm more optimistic than ever that 2039 is our most conservative scenario.

We very likely will get into this position, at least on the product side, quicker. From a capital allocation and engineering resource perspective, we are already putting ourselves in position to become a dominant electric company that covers all our portfolio positions by between 2025 and 2030. In that context, we have not yet selected a more official date, but I'm confident that we can go faster.

You have acknowledged that the move toward electrification will result in job losses and that now is the time to act responsibly to address this. Does that mean you believe this transition should be slowed to protect jobs?

I'm sure we won't slow down because technological progress needs to be maintained. We are going to be one of the companies that continues to push this forward. If anything, we should speed up. But, on the powertrain side, we have to do this in a socially responsible way.

Some of the powertrain jobs will be transformed, obviously, to the electric drivetrain. But it's no secret that the number of people needed to make an electric powertrain is less than that for a combustion engine. Let's be honest about this and work with the works councils to make sure that we get this transition right.

That being said, it's not like we will push a button and this happens from one year to the next. This is at least a 10-year process, but we need to start now.

Rather than artificially holding back technological progress to maintain jobs, we need to find ways to transform. It's also worth pointing out that some areas of the business will have high-quality job growth, particularly on the software side, where we are significantly boosting our resources. That means the auto company as an employer is not less attractive in the future.

How much production have you already lost to the chip shortage this year, and when do you expect this issue to be resolved?

We have not disclosed the exact number of units lost in Q1, but it was a number that we noticed. Q2 will be about the same as Q1, so the challenge remains. We hope the shortage will ease in Q3 and Q4.

Has the chip shortage caused you to rethink your chip supply strategy?

The pandemic, particularly when the virus spread so rapidly last winter and spring, provided the ultimate test for the auto industry's supply chain network, because from one day to the next, nearly all production was shut down. When we ramped down production last year, I don't think we lost a single unit because of a failure of the supply chain. We stopped to help authorities slow the spread of the virus and because we didn't want to build up too much inventory. The automotive supply chain proved during the pandemic that it is extremely robust.

With the chip shortage, three key things happened. One was the sudden stop in vehicle production during the second quarter of last year, which caused chipmakers to reallocate the production to other industries. The second event was the winter storm in Texas that knocked some chip plants offline, and a fire at an important chip plant in Japan this spring. These events had nothing to do with the pandemic, but they compounded the shortage. Therefore, I don't think that we should overreact to this situation. Having said that, the amount of computing power and sensing that we will put into a vehicle in the future is only going to increase. There is a necessity for additional investment in the semiconductor area.

For geopolitical reasons, the world's major economic powers want to make sure that they have this competency in their regions. While this is a good strategy, it doesn't mean we should replicate the same factory three times over for every single product that we make. It wouldn't make sense economically.