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May 13, 2019 12:27 PM

SUV demand means Mercedes U.S. factory might lose C class

Urvaksh Karkaria
Automotive News
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    Mercedes-Benz
    Mercedes-Benz may be considering booting its best-selling sedan out of U.S. production.

    VANCE, Ala.—In a move that speaks volumes about the evolution of Mercedes-Benz and U.S. consumers, the luxury auto maker is considering booting its best-selling sedan out of U.S. production, say sources familiar with the situation, to make way for the vehicles Americans want most—light trucks.

    Where and when the C class will move are unclear, and Mercedes executives have declined to comment on the plan, which forecasters believe will come as early as next year.

    The shift is a telling move.

    Mercedes spent nearly five years moving the C class into production at its sole U.S. factory, in Vance, Ala. It announced the decision during the global economic downturn in 2009, braving a backlash from German union officials who decried losing such a cornerstone of German factory output to the nonunion Alabama plant.

    It required considerable time and money to retool the U.S. assembly line and find local suppliers to finally launch the American C class in 2014. At the time, Mercedes estimated the move was creating 1,000 U.S. jobs.

    Now, just five years later, the sedan appears headed out of America—a casualty of shifting U.S. consumer trends. According to industry forecaster LMC Automotive, C-class sedan production in Vance will end in the fourth quarter of 2020.

    That scenario represents a new reality for a company that was long defined by luxury sedans and coupes and was once hesitant to sell a single light truck. It's a different Mercedes. The company expects SUVs and crossovers to represent about 60 percent of its sales in the U.S. next year.

    Its American factory is already feeling the pinch of that reality.

    'Where the future is'

    The 6 million-sq.-ft.Alabama plant is operating at 93 percent capacity, and is preparing to introduce more SUV and crossover volume. Alabama is the global production source of Mercedes' flagship GLS SUV, and GLE and GLE Coupe crossovers. Global GLS sales have been forecast to increase 30 percent over the next four years, while GLE crossover sales are expected to grow 28 percent during that time.

    "The SUV has really expanded from a consumer standpoint," said Jeff Schuster, president of global forecasting at LMC. "That's where the volume is; that's where the future is."

    Mercedes-Benz USA CEO Dietmar Exler declined to comment when asked last month about the possible C-class production move. Daimler's incoming chairman, Ola Kaellenius, also declined to comment when asked last month.

    In a statement last week, Daimler said, "We do not comment on speculation." But the statement added: "The Mercedes-Benz Cars production network reacts flexibly on market demands and plant capacities."

    Exler: SUVs perfect for U.S.

    Exler provided a more reflective outlook, saying that SUVs are "the perfect vehicle for the U.S."

    "Americans like their space," he said. "They like the convenience of SUVs. The U.S. demographically will stay as a suburban country."

    In addition to Alabama, the C class is made in Bremen, Germany; East London, South Africa; and Beijing. C-class production from the U.S. could head to Mercedes' South Africa plant, which produces C-class sedans for export to right- and left-hand drive markets. That plant has 25 percent production capacity available, according to LMC data.

    Meanwhile, the Alabama factory is amid a $1 billion expansion as it preps to launch electric vehicles. Mercedes predicts its EQ subbrand of EVs could account for 15 to 25 percent of its global sales by 2025.

    Local production of the EQGLE crossover is expected to begin in the second quarter of next year, followed by the EQGLS SUV in 2022.

    Those plans represent even more competition for the U.S. factory's production capacity.

    The decision facing Mercedes' U.S. plant is symptomatic of the seismic shift in consumer tastes away from sedans. That shift is especially pronounced in the luxury segment, where consumers want it all—comfort, performance and roominess.

    Crossovers and SUVs accounted for 64 percent of new luxury-vehicle sales in the U.S. last year, according to the Automotive News Data Center. That share is up 14 percentage points from 2015.

    "That's leading to a lot of tough decisions in the industry on the car side of the business," Schuster said. "This is one of them."

    In hindsight, Mercedes' 2009 decision to bring sedan production to Alabama might seem to be a mistake. But at the time of that announcement, America was loyal to sedans. And about the time the C class launched, light trucks accounted for just more than half of the passenger-vehicle market, 53 percent in 2014 and 57 percent in 2015. Today, light trucks account for 70 percent.

    "That's how fast the market has swung in the other direction," said Ron Harbour, a manufacturing consultant with Oliver Wyman. "The market has really caught a lot of people flat-footed."

    LMC forecasts U.S. C-class deliveries to nosedive 47 percent this year from 2015. Sales will continue to slip 13 percent more until the C-class redesign in 2021.

    As sales slide, so has the C class' share of production in Alabama—down to 20 percent last year from 31 percent in 2015, LMC said. Compounding that changing equation: The Alabama C class is strapped with an aging design from 2014.

    Supply and demand

    The sedan-to-light trucks transition illustrates the need for auto makers to be nimble with their production strategies so they can adjust to market conditions, Harbour said.

    "What it's really revealing is who's good at flexibility and capital efficiency," he said.

    Honda, for instance, has standardized vehicle architecture and assembly processes across its models to make factory moves easier. "That allows Honda to move production between plants faster and for less money," Harbour said.

    Honda manufacturing veteran Chuck Ernst, retired senior vice president of the auto maker's production unit in Lincoln, Ala., was tasked with making vehicle moves similar to the scenario facing Mercedes.

    At about the time Mercedes was deciding to move its C class from Germany to Alabama, Honda found that rising gasoline prices were deflating sales of its Alabama-built Odyssey minivan and Pilot crossover. And just as Mercedes brought over the C class from Germany, Ernst and the Honda team introduced the big-volume Accord from Honda's plant in Marysville, Ohio, to Alabama.

    "If you need volume to keep the business viable within a facility," Ernst said, "the best thing you can do is swap out what's not selling with what is selling."

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