Via its deep research and development capability, Mercedes-Benz has become an innovative world leader in automobiles. The organization has a large team of seasoned and innovative analysts who constantly scan the industry and forecast changes in customers’ potential mobility needs, as well as development engineers who systematically incorporate new innovations in goods (Daimler 106). Employees are encouraged to participate in innovation and development in order to provide consumers with intriguing and customized goods. So far, the Mercedes Benz has its global research and development network in 23 locations across 11 countries.
The Mercedes Benz appreciates that it must have strong partners for it to attain its ambitious goals. It works closely with the suppliers research and development departments. By involving the supplier industry, the Mercedes Benz is able to deal with the rapidly changing technology in the automotive sector. In addition, this cooperation has helped the company in its digitization processes across the entire value chain. Besides, these strategic partnerships are supportive in its efforts to develop and provide new concepts for future mobility (Daimler 106). The company also manages to keep its brands distinct and unique while safeguarding the automobiles future.
Intellectual Property Rights
Since the invention of the companys automobile by Carl Benz in 1886, Mercedes Benz registered its first patent, and has now over 100,000 patents. By registering these ideas, the Mercedes Benz has been able to exclusively use them in advancing its products and an increased scope of operations (Daimler 107).
Sound Financial Management Policies
Mercedes Benz adopted and operates prudential financial management policies within the framework of benchmarks, limits and guidelines, which separate them from other financial activities such as controlling, settlement and reporting. In designing the companys capital structure, the Mercedes Benz uses the principle of cost-optimized and risk-optimized liquidity and capital resources (Daimler 91). It also strictly abides by the restrictions on capital transactions and transfer of currencies. The company also manages its liquidity to ensure that it timely meets the obligations. Through its liquidity planning, it gets information about cashflows from both the investing and operating activities. Additionally, through the cash management initiatives, the Mercedes Benz is able to assess its cash surpluses and requirements, and perform netting where necessary.
Availability of Several Sources of Finances
The Mercedes Benz has a wide variety of sources to raise the required funds. It has a number of financial instruments in various markets and currencies (Daimler 96). The commonly used financial instruments include the commercial papers, bank credits, customer deposits, medium and long-term maturity bonds, and the securitization of receivables.
Engaging in Sustainable Strategies
The company has developed and integrated a sustainability strategy into its corporate goals. The Mercedes Benz takes account of its activities and the impacts they have on the environment and people. As a result, it has improved its acceptance by the society, which in turn has led to a sustainable profitability (Daimler 105).
The Mercedes Benz is likely to be faced with litigations for the failure to comply with some laws. For instance, it was fined an amount of $56 million by the Chinas Jiangsu Province for price fixing and monopolistic behaviors (Hsu).
The Mercedes Benz has an opportunity to become the worlds leader in digitization. It has the ability to exploit the opportunities offered by the connectivity and the internet. In fact, the company has already changed itself from a leading vehicle firm into a mobility service provider. It is working to achieve digital transformation across its all business units. Through this digital transformation, the company will have an opportunity to increase its market. In its 2015 annual report, Mercedes Benz noted that it focused on the customers experience with its products and how it would cultivate and maintain the relationship with them (Daimler 16).
The company faces various economic threats such as the market price risks. It is exposed to interest rates, foreign exchange rates and commodity price fluctuations (Daimler 91). It, however, cautions itself against them through hedging decisions.
Also, the global economic environment is generally sluggish (Daimler 79).
SWOT Analysis of BMW
Strong Premium Brands
The BMW, MINI and Rolls-Royce are the companys three main premium brands which are widely known and admired across the world for their innovative technologies as well as the state-of-the-art design (BMW Group 19). These brands have been customized to meet customers demand such as the innovative models that are fuel-efficient and high performance.
Prudent Investment Decisions
The BMW manages its investment in every segment on the basis of return on capital employed. Through this approach, it is able to get the changes in the business value. Each segment is required to realize a minimum return equal to the cost of capital (BMW Group 22). Therefore, the value management approach is used in controlling its projects.
Strong Research and Development Capability
The company has been able to maintain its competitiveness through research and development initiatives. On top of innovations of new automobiles, the BMW uses its Efficient Dynamics strategy to continually improve energy efficiency and minimize the emissions of its automobiles (BMW Group 38).
BMW appreciates that it requires cooperation arrangements to keep up with the pace of technological innovations. It has thus engaged with selected partners in the research and development activities (BMW Group 38). For example, it has collaborated with them in cross-sector input.
The BMW engages in sustainability activities to safeguard its future business model. In 2015, it was ranked among the global leading automobile makers for the second consecutive time in terms of sustainability.
The notable weaknesses would arise whenever the BMW contravened the laws and regulations, and legal claims brought against it (BMW Group 109).
BMW has an opportunity for its products if the global economic situation continued with the 2015 trend. In 2015, the world economy recorded a 3.1% growth, especially with an improvement in the two major global automotive markets. The Chinas market continued to positively respond to the governments efforts of making it more stable and sustainable while the US recorded a robust growth (BMW Group 23). Indeed, in 2015, the improved Euro market supported increases in the companys sales by 10.9% (BMW Group 28).
The general global economic environment adversely affects the companys business. For instance, China market recorded a decline in demand in 2015; Japanese economy did not gain any material momentum as its growth was merely 0.6%, while Russia and Brazil had negative growths of 3.8% and 3.6% respectively (BMW Group 23).
The company is also affected by adverse movements in currency markets.
Globalization is also posing some challenges to the BMWs sales and production operations (BMW Group 41).
As indicated in table 1 below, the revenues for Mercedes Benz have been more than those of the BMW for the last three years. However, both companies recorded a continuous growth in their sales. The Mercedes Benzs revenues were €117,982 million, €129,872 million and €149,467 million in 2013, 2014 and 2015 respectively. On the other hand, the BMW recorded €76,059 million, €80,401 million and €92,175 million in 2013, 2014 and 2015 respectively.
Profitability Ratios Trend
These ratios evaluate the profit earnings ability of an entity and/or how effective it has been in meeting its overall returns goals, and are computed in reference to resources invested such as the assets and capital, and sales (Nikolai, Bazley and Jones 280). The gross profit margin is important in evaluating an entitys ability to control the cost of sales. As shown in table 1 below, BMW recorded a lower gross margin (20.07%, 21.15% and 19.67%) than Mercedes Benz (21.30%, 21.70% and 21.04%) in 2013, 2014 and 2015 respectively. The net profit margin measures the returns in reference to the sales. In other words, it narrows the focus of profitability, by indicating an entitys ability to realize revenues and effectiveness in cost control. Though the Mercedes Benz recorded a higher gross margin than the BMW, the latter had a higher net profit margin than the former over the three periods. It, therefore, follows that the BMW was able to control its operating costs than its competitor did.
The return on equity is necessary in showing the contribution towards the profitability made by each $1 contributed by the common stock owners. As indicated in table 1 below, Mercedes Benz had good returns on the shareholders equity compared to the BMW. The Mercedes Benzs ROE was 15.81%, 16.13% and 17.33%, while that of the BMW was 14.83%, 14.63% and 15.97% in 2013, 2014 and 2015 respectively. The return on assets is useful in assessing the return on net earnings from an investment of $1 in total assets. In this metric, the Mercedes Benz also outperformed its competitor. However, the Mercedes Benz performance slightly dropped in 2014 to 3.89% from 4.13% in 2013, but increased in 2015 to 4.14%. The return on assets for the BMW indicates an upward trend all through 3.61%, 3.63% and 3.90% in 2013, 2014 and 2015 respectively.
Table 1: Trend in Sales and Ratios
Mercedes Benz BMW Year 2013 2014 2015 2013 2014 2015 Sales (EUR Millions) 117,982 129,872 149,467 76,059 80,401 92,175 Profitability ratios Gross margin = Gross profit/sales 21.30% 21.70% 21.04% 20.07% 21.15% 19.67% Net margin = net earnings/sales 5.80% 5.36% 5.64% 6.41% 6.61% 6.91% Return on equity = net earnings/equity (Nikolai, Bazley and Jones 280) 15.81% 16.13% 17.33% 14.83% 14.63% 15.97% Return on assets = net profit/total assets 4.13% 3.89% 4.14% 3.61% 3.63% 3.90% Liquidity ratio Current ratio = current assets/current liabilities (Bagad 83) 1.19 1.15 1.19 1.04 0.96 0.94 Solvency ratio Debt ratio = total debt/total assets (Nikolai, Bazley and Jones 284) 74.67% 76.97% 75.34% 74.38% 75.96% 75.30%
The liquidity trend, which shows the companys performance in regards to its ability to meet its short-term obligations. To assess the liquidity of the Mercedes Benz and the BMW, this paper computed the current ratio. As indicated in table 1 above, the current ratio of Mercedes Benz was 1.19, 1.15 and 1.19 while that of the BMW was 1.04, 0.96, and 0.94 in 2013, 2014 and 2015 respectively. These results imply that the Mercedes Benz managed to meet its maturing obligations while the BMW could not in 2014 and 2015. However, both companies had a current ratio below the recommended value of 2 (Bagad 83). The solvency trend was computed by assessing the proportion of borrowings used to finance the assets of the two companies. As shown in table 1 above, both companies were highly debt financed at 74-77%.
Trend in the Cashflows from Operating Activities
As per the Generally Accepted Accounting Principles, the companies are required to present the statement of cashflows separated into three main business activities: operations, investing, and financing. This paper is interested in assessing the trend in the cashflows from the operations for both companies. As indicated in table 2 below, the cashflows from operations for the BMW were better than those posted by the Mercedes Benz. The Mercedes Benz had €3,285 million in 2013, but dropped by €4,559 million to (€1,274 million in 2014) before improving by €1,496 million to €222 in 2015. On the other hand, the BMW recorded net cashflows from operating activities of €3,614 million in 2013 before slightly dropping to €2,912 million in 2014, and further declining to €960 million in 2015.
Table 2: Trend in the cashflows from operations
Mercedes Benz BMW Year 2013 2014 2015 2013 2014 2015 Cash flows from operations (EUR Millions) 3,285 -1,274 222 3,614 2,912 960
Cashflows from Operations and Operating Incomes
As shown in table 3 below, the operating incomes of Mercedes Benz were €8,609 million, €8,414 million, and €10,630 million while those of the BMW were €7,145 million, €8,241 million and €8,679 million in 2013, 2014 and 2015 respectively. These figures are indeed different from the companies cashflows from operations. These differences are attributable to the items included or excluded in each case because the cashflows from operations is a statement of cashflows element which is computed from the years net profits while the operating incomes is a component of the income statement.
Table 3: A comparison of the operating incomes and net operating cashflows
Mercedes Benz BMW Year 2013 2014 2015 2013 2014 2015 Cash flows from operations (EUR Millions) 3,285.00 (1,274.00) 222.00 3,614.00 2,912.00 960.00 Operating incomes (EUR millions) 8,609.00 8,414.00 10,630.00 7,145.00 8,241.00 8,679.00
Discussions on Some of the Items of Cashflows from Operations and Operating Incomes
Some of the items affecting the operating incomes include the costs of sales, and the operating costs. Mercedes Benz recorded €117,670 million in 2015 from €101,688 million in 2014 (Daimler 217). This increase was attributed to the higher business volumes leading to higher material expenses (Daimler 88). The higher business volume is strength to the company while the increase in the cost of sales has adverse effects. The selling expenses also increased due to the growth in sales. However, this rise was positive because as a proportionate of revenues, it decreased to 8.1% in 2015 from 8.9% in 2014. The research and development costs also increased, but as a percentage of sales, the rise was good for the company as it decreased to 3.2% from 3.5%. Mercedes Benz also managed to significantly decrease its other operating expenses.
The cashflows from operations was affected by the increase in the leasing and sales financing businesses to support the companys growth strategy. There were positive effects from the decreased pension contributions, and higher tax refunds (Daimler 92).
The BMWs cost of sales increased at a higher proportion than the sales, hence a weakness on the part of the company in controlling them. The consequences were a drop in the gross profit by €167 million (BMW Group 59). The selling expenses indicated that the company was strong while the administration costs had adverse effects on it. The research and development costs increased by 14.6% as the company continued its innovations, hence its strength.
Recent Articles on Mercedes Benz and BMW
On Mercedes Benz
The article entitled 2018 Mercedes-Benz CLS could drop AMG V8 variant was written by Sheehan. The author talked about the continued innovation by the Mercedes Benz. In this context, he stated that the company was working on a new model, the CLE that would be unveiled in 2018. The presence of E shows its mechanical and structural associations to the E-Class, but it will also have the CLS moniker. It will be a four-door vehicle with its engine compatible with that of the E-Class. It will also have a turbocharged four-cylinder engines selection that forms the line-up bulk. Besides, it will have a more defined boot lid and less aggressive exterior. Its body proportions are similar to those of the existing cars, implying that it will be smaller than the GT four-door model. Other features include the semi-autonomous driving technologies exhibited by the E-Class. The company has not declared the exact release date.
The business implication of this article is that the company will continue selling its current models as they are not very much different from what is expected. Besides, the consumers who want to buy its brands may not wait for the new model, which will be unveiled in the unknown future. However, this information may serve a given portion of customers with information that they feel that the new model will meet some customized requirements, making them wait to buy it when availed in the market.
An Article on BMW
The article was written by Taylor and is entitled BMW fights back against Mercedes with biggest model launch to date. It is about the initiatives that the BMW is planning to take to reclaim its lost market to Mercedes Benz. The author stated that BMW through its research and development capabilities, plans to rollout over 40 new and revamped models in its fight back efforts. The company spent 5.16 billion euros on its research and development in 2016 with plans to commit more in the next two years. The article shows a turnaround strategy by the company, and which will see its profitability rise. Through these strategies, the company will have increased its range of brands offering in the market. As a result, its revenues and profitability will go up.
The Company to Invest in
In committing ones funds in the form of investment in either of these companies, it is prudent that both financial and nonfinancial metrics are considered. This paper advices a potential investor to purchase the Mercedes Benzs stock. The companys recorded huge amounts of revenues, and which were continually rising. Besides, its policy on the costs of sales control was better than that of BMW as shown by the gross profit margin.
As indicated by the by the current ratio, Mercedes Benzs short term financial healthiness was good over the three periods compared to that of BMW. Having enough current assets implies that the company will have its non-current assets involved in the production processes uninterrupted. As a result, the benefits of this move have been seen with its higher return on assets. Also, as shown by the return on equity, Mercedes Benz is a better and viable investment. The investor will have his/her well used towards the realization of profits. Besides, it records millions of euros in net profits, implying that the company can distribute incomes to the investors as dividends.
The company is also a feasible investment vehicle as it remains the most innovative automobile entity in the world. Through its research and development activities, it has been established that Mercedes Benz has managed to develop customized and high class vehicles for its customers. It has engaged in strategic collaborations with other parties in the research and development initiatives. Mercedes Benz has registered patent rights for over 30 years, and continued to register more.
Bagad, V.S. Managerial economics and financial analysis. Maharashtra: Technical Publications, 2008.
BMW Group. BMW Group Annual Report 2015. Financial report. Munich: BMW Group, 2015.
Daimler. Annual report 2015. Financial report. Stuttgart, Germany: Daimler, 2015.
Hsu, Sara. China fines Mercedes-Benz, not domestic firms. 24 April 2015. http://thediplomat.com/2015/04/china-fines-mercedes-benz-not-domestic-firms/. Accessed 26 March 2017
Nikolai, Loren A., John D. Bazley and Jefferson P. Jones. Intermediate accounting . Boston: Cengage Learning,, 2009.
Sheehan, Sam. 2018 Mercedes-Benz CLS could drop AMG V8 variant. 4 March 2017. http://www.autocar.co.uk/car-news/new-cars/2018-mercedes-benz-cls-could-drop-amg-v8-variant. Accessed 26 March 2017
Taylor, Edward. BMW fights back against Mercedes with biggest model launch to date. 21 March 2017. http://www.autonews.com/article/20170321/COPY01/303219964/bmw-fights-back-against-mercedes-with-biggest-model-launch-to-date. Accessed 26 March 2017