Unable to outrun Tesla or climate change, Mercedes goes all in on EVs

July 22, 2021, 6:52 PM UTC

Feeling the heat from Tesla on the one side and from regulators on the other, Mercedes-Benz doubled its ambitions and now expects that by 2025 about 50% of the cars it sells will be partly or solely powered by a battery. 

Daimler’s core auto division earmarked over €40 billion euros in spending for its battery electric vehicles (BEVs) program through the end of the decade, unveiling plans on Thursday to shift entirely to clean, zero emission vehicles by 2030, if possible.

The announcement comes only a week after the European Commission announced plans to ban conventional internal combustion engine (ICE) cars by 2035 as part of a wider roadmap to tackle climate change.

“The tipping point is getting closer, especially in the luxury segment where Mercedes belongs,” said Daimler CEO Ola Källenius during a presentation. “And that’s why we’re upping the ante, accelerating from EV-first to EV-only.” 

By 2025, the company will offer a BEV alternative for every model in its range, despite substantially higher manufacturing costs, which aren’t expected to converge with those of ICE cars until 2030. 

To protect its profitability in the transition, the company plans a “radical reduction” in all product investments not related to BEVs. No new vehicle platforms will be developed for ICE cars. That means new plug-in hybrids that marry a battery with a gasoline or diesel engine will also eventually run out in the course of the decade. 

Courtesy of Mercedes-Benz

As part of those plans it will install, together with partners, eight factories across the globe, including one in the U.S., producing a combined annual output of 200 gigawatt hours worth of battery cells, roughly equivalent to 2 million BEVs.

For management, the mid-term target is nearer than it appears as it typically takes three years and sometimes more to develop a new model from scratch. These long lead times mean fundamental shifts in strategy first need to work their way through the system before the effects can be felt.

Help from Formula 1

As part of the process, Mercedes also plans to phase out distribution via franchise dealerships wherever legally permitted. Bit by bit, market by market, it will shift to a direct sales model where the entrepreneurial risk shifts from the car retailer to the car company. 

Mercedes has employed this in the past in Germany, but only as a stopgap solution when a dealer went bankrupt in a key sales territory. Tesla has shown that the value of owning a customer’s data and the ability to sell them services over the lifetime of a vehicle opens up new earnings potential in what was otherwise a low-margin business.

To demonstrate what the brand can achieve, Mercedes will present over the course of next year a concept car called the Vision EQXX capable of driving over 1,000 kilometers (621 miles) on one charge, engineered in part with the help of the top minds from its Formula 1 team.

“The goal is to massively reduce consumption with extraordinary efficiency improvements in almost all areas,” said Mercedes operations chief Markus Schäfer, adding these developments would later benefit series production cars in the future.

Achieving that means better aerodynamics than the Mercedes EQS, which it claims has the lowest drag coefficient of any production car ever built, as well as a 20% improvement in energy density at the cell level.

“Our experts are pushing the boundaries of what’s possible in terms of electric motor, inverter, battery design, packaging and thermal management,” he said. “They are chasing marginal gains that compound to a substantial increase in range.”

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