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OM in the News: Mercedes Heads East To Hungary

April 13, 2012

Businessweek (April 7-14,2012) reports that Mercedes has began production at its new $1.07 billion factory, located in Kecskemét, Hungary to make its B-Class compact. By heading so far east, CEO Dieter Zetsche is betting that Hungary’s rock-bottom wages will allow the automaker to wring more profit from its small-car, luxury lineup. “This could be the final big plant by a European carmaker in the region,” says one auto analyst. “ The growth and expansion have shifted to Asia and Latin America.”

Hungarian workers are paid a fifth of the about $61 per hour German workers cost, so Mercedes will use the factory to profitably meet its goal of boosting sales 27 percent, to 1.6 million vehicles by 2015. The Kecskemét plant is the first new Mercedes factory since the brand began producing cars in Alabama in 1997. Manufacturing costs at the plant are 30 percent lower than in Germany.  Lower production costs, including increased parts-sharing among models, are part of Mercedes’ plans to save €6 billion by 2017 to offset rising raw material costs and increased spending to lower carbon-dioxide emissions of its vehicles. With about 40 working hours spent to assemble the Mercedes compacts, the savings are about $2,000 per car.  Daimler aims to reduce the average hours spent assembling a vehicle in Hungary to 30.

In Europe, auto sales are poised to decline for a fifth consecutive year in 2012. The region’s automakers will likely use about 65 percent of production capacity this year, down from 71 percent last year. The unused assembly lines could manufacture an additional 10 million vehicles. Given the capacity overhang, it will take plant closures and job cuts to make auto production in Europe profitable again, says Sergio Marchionne, CEO of Fiat Chrysler, who last year closed a Fiat plant in Sicily. In February, Mitsubishi also said it will stop making cars at its factory in the Netherlands.

Discussion questions

1. Why is Mercedes “heading east” to Hungary and “west” to the US?

2. Is capacity an issue with the firm? Other automakers in Europe?

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