Rolls-Royce, Maybach $350,000 Cars Fail to Find Buyers, Profits
Oct. 6 (Bloomberg) -- Andrew Ralph was so interested in the Rolls-Royce Phantom that he tested it twice at Murray's Motors in Edinburgh. He liked the handling of the car, which costs 218,000 pounds ($390,000). He didn't like the pony-sized front hood.
It's so in-your-face,'' says Ralph, 36, managing director of Ralph Institutional Advisers Ltd., a bond brokerage, adding that a BMW sedan, which sells for $117,000 at the most, drives as well.
I'm still too young for it; it's just not me yet.''
DaimlerChrysler AG, Bayerische Motoren Werke AG and Volkswagen AG are finding fewer buyers for their $320,000 to $357,000 luxury sedans than they expected in 1998 when they decided to begin making the cars. The 62 percent decline in the Nasdaq Composite Index since its peak on March 10, 2000, and the Sept. 11 terrorist attacks have damped demand.
DaimlerChrysler's Maybach, BMW's Rolls-Royce and Volkswagen's Bentley divisions probably will never earn back the $2.5 billion their German parent companies have invested in them, according to a study by Goldman Sachs Group Inc.
The use of management time and cash on super-luxury products is a diversion from the goal to expand core product lineups,'' says Max Warburton, an analyst at Goldman Sachs and author of the May report on the luxury-car industry.
And that is for what will be at best a negligible financial return.''
None of the three luxury brands has yet produced a positive return on equity, according to the carmakers.
Diverting Attention
The luxury-car strategy draws management's attention away from profitable and better selling models, says Peter Braendle, a fund manager at Swissca Portfolio Management in Zurich.
It's fun for managers to be involved in these very famous, prestigious brands,'' says Braendle, who holds shares in all three carmakers among the $40 billion that Swissca manages.
They really should be concentrating on their main brands. That's where they make their money. These brands on top take them away from that.''
BMW and Volkswagen began their luxury-car race in 1998, when they battled against each other to buy the Rolls-Royce and Bentley car-production unit from Vickers Plc. Volkswagen, based in Wolfsburg, Germany, won with a bid of $854 million.
Munich-based BMW wound up with the Rolls-Royce name by buying it for $71 million from airplane-engine maker Rolls-Royce Group Plc because Volkswagen hadn't secured the rights. DaimlerChrysler joined the contest by deciding the same year to resurrect the 1930s-era Maybach brand.
Exclusive Models
At the time, the companies said they needed elite brands to be able to offer more exclusive models to their richest and most demanding customers. Rising wealth levels in the U.S. and Europe led them to expect a steady increase in demand for super-luxury vehicles.
That hasn't happened.
When we all made our plans, this was a segment of about 8,000 to 10,000 sales per year, including the high-priced sports cars,'' says Juergen Hubbert, a board member at Stuttgart-based DaimlerChrysler.
The past three years, this has come down significantly, by more than half. In these difficult times, with the situation in the U.S. after Sept. 11, the economy in Germany, people just don't want to be seen in such a car.''
The $11 trillion U.S. economy dipped into recession in 2001. The Sept. 11 attacks killed 2,992 people. The U.S. has lost 1.03 million jobs since March 2001. Germany has lost 741,000 jobs in the same period and the economy shrank 0.1 percent in 2003, the first annual contraction in a decade. It grew 1.5 percent in the second quarter from the same period a year ago.
$10 Million Worth
As recently as July 2002, when the Maybach was introduced in the U.S., Hubbert said the worldwide market for $300,000 cars could increase by as much as 50 percent within three years.
Worldwide, 268,000 people have a net worth of more than $10 million, based on the Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003.
DaimlerChrysler said it expected to sell 1,000 of the Maybach cars in 2003 and the same number this year. The cars have reclining seats in the rear and a sunroof that switches between clear, frosted and opaque at the touch of a button.
Instead it delivered 600 models made to order last year and expects to sell about the same number or slightly more this year, says Hubbert, 65, who stepped down on Sept. 30 as head of the Mercedes Car Group.
Who wants to go out and spend four times as much on a Maybach as a Mercedes S500? Not me,'' says Leon Vaysburd, 23, a trade control manager at WestLB AG in New York. He is selling a 3- year-old S500 and plans to replace it with a new version of the same model, which costs $84,620.
Fewer Buyers
Rolls-Royce Motor Cars planned to sell 800 cars last year and 1,000 in 2004. The unit delivered 300 cars in 2003 and says it will
fight'' to reach the 1,000 sale level this year after delivering 500 Phantom models through September.
Bentley found only 607 buyers for its $208,000 to $265,000 Arnage sedan last year, down from 883 in 2002. For this year, the company initially forecast sales of as many as 800 vehicles, which offer customers a choice of 27 shades of leather for the seats and a built-in bar or refrigerator. Bentley now expects only 650 cars will sell this year.
As it switches focus from its traditional super-luxury sedans to less expensive sport coupes such as the $150,000 Continental GT, Bentley says it will increase total sales to 9,000 a year by 2006. It aims to sell 5,000 vehicles in total this year.
18 Cows
The new Phantom, introduced last year, is the seventh version of the luxury sedan from the 100-year-old carmaker -- and the most expensive, after inflation is considered.
The first Phantom, released in 1925, listed at 2,937 pounds. With inflation as calculated by the U.K. Office for National Statistics, that is worth 113,000 pounds today. The Phantom V, released in 1959, retailed at 6,630 pounds, the equivalent of 60,500 pounds today -- compared with the current price of 218,000 pounds.
The new Phantom is also more expensive than the recent models it replaces. Rolls-Royce's 1998 Silver Seraph retailed for 159,000 pounds, which is now worth about 177,000 pounds.
The 19-foot-long Phantom has a 4 1/2-foot-long peaked hood, a vertical front grill and a silver angel ornament flying 40 inches off the ground. Its BMW 6.75-liter, 12-cylinder engine accelerates the car to 60 miles (97 kilometers) per hour in 5.7 seconds; the hides from as many as 18 cows are used in the leather seating and interior trim. And then there's the back-seat umbrella stand.
To Mark Hennessy, who owns a Rolls-Royce showroom in Atlanta, that ostentation is a deterrent.
Front-End Appeal
Nobody knows when you fly in your private jet, or when you visit your fourth or fifth house; everyone notices when you drive that vehicle,'' says Hennessy. 50.
It's a hurdle to overcome.'' He has sold three Phantoms since March.
To broaden the brand's appeal to customers, Rolls-Royce is also considering bringing out less expensive models, says Rolls- Royce Motor Cars Chief Executive Officer Karl-Heinz Kalbfell. They would still cost more than $200,000.
We have a target that we set in 1998 and it hasn't changed,'' says Kalbfell, 54, adding that the last three months of the year are traditionally the strongest for sales because bankers and traders receive their annual bonuses.
Break Even?
Kalbfell declined to say when return on equity would turn positive for his unit. Hubbert in 2002 said Maybach would begin to earn money in 2007 or 2008. Since then, he has only said the brand is on course for
long-term success.''
It's an attractive market niche, but it looks like demand isn't rising as fast as supply,'' says Michael Schneider, a fund manager at Frankfurt-based Deka Investment, which owns shares of all three carmakers among the $144 billion it manages.
I'm not sure yet which one will be the loser.''
Bentley, which has had an operating loss each year since Volkswagen bought it, expects to break even in 2004, says Mark Tennant, the 38-year-old head of marketing and product strategy at Bentley.
Even enthusiastic buyers say these cars aren't perfect.
Michael Fux, CEO of West Long Branch, New Jersey-based Sleep Innovations Inc., which makes foam pillows and mattress pads, owns the champagne-colored Maybach 57 that appears in a photo in DaimlerChrysler's 2003 annual report. The document quotes him saying the car provides a
maximum standard of comfort at all times.''
He doesn't care for the exterior.
Record Profit?
The first thing people ask me: `Is that a new Mercedes- Benz?''' Fux, 61, says from his Miami home.
If someone is going to shell out $350,000 for a Maybach versus $125,000 for an S600, they want a car that looks really different.''
Among the German carmakers, BMW is best positioned to absorb a loss from its luxury unit. BMW reported a record profit of 671 million euros ($811 million) in the second quarter, and the company expects another record for the full year as customers snap up its compact, mid-size and full-size luxury cars, sport-utility vehicles and the Mini, CEO Helmut Panke, 58, said. He didn't mention Rolls-Royce in that outlook, delivered in an August conference call.
Volkswagen in July cut its 2004 operating profit target by 24 percent to 1.9 billion euros, before one-time costs, which the carmaker expects to be about 400 million euros, as German demand weakens and sales in China slow.
DaimlerChrysler's earnings in the second quarter rose fivefold to 554 million euros as the Chrysler division returned to profit. Earnings for the Mercedes Car Group, which includes Maybach, fell 18 percent to 703 million euros because of aging Mercedes models such as the A class and costs associated with trying to improve vehicle reliability.
`Pure Luxury'
The target for all three projects is to make money, but it's questionable whether they will,'' says Philipp Rosengarten, a Frankfurt-based analyst at Global Insight, a forecasting and consulting firm with headquarters in Waltham, Massachusetts.
Volkswagen and DaimlerChrysler have been having a hard time for the past year, so it's hard to justify the expense.''
Volkswagen reported pretax losses totaling 430 million euros for Bentley for 1998 through 2000. It ceased to publish the figure after that by folding Bentley into the Volkswagen car group. DaimlerChrysler doesn't provide separate figures for the Maybach, which is built in Sindelfingen, Germany, in the same plant as the Mercedes S500.
Bentley plans to continue making the Arnage even as it spends most of its time and money on the Continental GT and models derived from it. The GT has a waiting list of about nine months.
The Rolls did surprise me, the power and handling, but it's still not my cup of tea,'' says Ralph, who used his Aston Martin Vanquish to beat a Ferrari 355 in a race at the Goodwood, England, track this year.
Source: Bloomberg