Annual Report 2016

Overall Assessment of the Economic Situation

In the opinion of the Board of Management, the Daimler Group’s economic situation continues to be very satisfactory at the time of publication of this Annual Report. In recent years, we have implemented our strategy effectively and with great determination. This already led us onto a stable and profitable growth path in the year 2014, along which we progressed further in 2015 and 2016. Revenue and unit sales surpassed the prior-year levels, and the Daimler Group’s EBIT adjusted for special items was also higher than in the previous year, as we had already forecast in Annual Report 2015. It is noteworthy that we achieved this profitability target although the economic conditions for our truck business developed very unfavorably in various markets. This shows that we have adapted our business model so that we can generate reasonable earnings also in a difficult environment. In this regard, we have made great progress in recent years, and we will continue working on it in the future. This is one of the main reasons why our profitability is sound, and for this reason we have the resources to focus our business activities on the future: with outstanding vehicles, innovative services and tailored solutions for the mobility of tomorrow.

In the year under review, we increased our unit sales to a total of 3.0 million cars and commercial vehicles (2015: 2.9 million). Thanks to numerous new and successful products, Mercedes-Benz Cars and Mercedes-Benz Vans set new records for unit sales. Daimler Trucks’ an Daimler Buses’ unit sales decreased significantly due to the extreme weakness of some major markets. Driven primarily by the positive development of the car and van business, the Daimler Financial Services division also continued to grow in 2016. The Daimler Group’s revenue therefore also increased – by 3 % to €153.3 billion. Adjusted for exchange-rate effects, revenue also grew by 3 %.

The Daimler Group’s operating profit (EBIT) adjusted for special items of €14.2 billion was higher than in 2015 ( €13.8 billion). Each of the Mercedes-Benz Cars, Mercedes Benz Vans, Daimler Buses and Daimler Financial Services divisions increased its EBIT, while Daimler Trucks posted lower EBIT in line with the development of its unit sales. But in the automotive business overall, we once again achieved our target for return on sales adjusted for special items of 9 %, and Daimler Financial Services’ return on equity was also at the targeted level of 17 %.

As a result of the positive development of earnings, we once again achieved a very good return on net assets of 19.2 % (2015: 20.1 %). We therefore once again earned substantially more than our targeted minimum return on capital employed (8 %). This is reflected by our value added of €5.3 billion, which almost equaled the prior-year figure (2015: €5.4 billion).

In line with the ongoing high level of earnings, we continue to have very sound key financial metrics. This is confirmed also by the rating agencies Standard & Poor’s Global Ratings (S&P) and Moody’s Investors Services (Moody’s). S&P upgraded the long-term credit rating of Daimler AG from A- to A in November 2016. In early February 2017, Moody’s also raised Daimler’s long-term credit rating A3 to A2. In both cases, the short-term ratings were raised as well: from A-2 to A-1 and from P-2 to P-1 respectively.

The Group’s overall equity ratio and the equity ratio of the industrial business remained at the high levels of 22.9 % and 44.7 % respectively (2015: 23.6 % and 44.2 %). The net liquidity of the industrial business increased to €19.7 billion at the end of 2016 (2015: €18.6 billion). The free cash flow of the industrial business – the parameter we use to measure financial strength – was once again significantly higher than the dividend distribution at €3.9 billion (2015: €4.0 billion). This was achieved although we significantly increased our investment in intangible assets and property, plant and equipment.

We want our shareholders to participate appropriately in the very good level of earnings achieved by Daimler once again in 2016. At the Annual Shareholders’ Meeting on March 29, 2017, the Board of Management and the Supervisory Board will therefore propose a dividend of €3.25 per share (prior year: €3.25). The dividend distribution will be unchanged from the previous year at €3.5 billion.

In order to implement our growth strategy with new products, innovative technologies and modern production capacities, we increased the expenditure for securing our future in 2016 from an already very high level by a total of €1.8 billion to €13.5 billion: €7.6 billion for research and development (2015: €6.6 billion) and €5.9 billion for investment in property, plant and equipment (2015: €5.1 billion).

This substantial expenditure is necessary because the automotive industry is facing a fundamental transformation. And as the inventor of the automobile, we intend to play a major role in shaping the mobility of the future. In this context, we are increasingly focusing on strategic areas for the future: connected, autonomous, shared & services and electric. We plan to occupy a pioneering position in these areas - in each of them individually as well as by linking them up intelligently. Our innovative vehicles and services are already trendsetters for future mobility. For example, our new E-Class is extensively connected and available to our customers in partially automated mode, and we are at the forefront in truck technology with the Freightliner Inspiration Truck and the Actros with Highway Pilot. And with the Mercedes-Benz Future Bus in 2016, we were the first manufacturer worldwide to present a city bus that drives in partially automated mode in real traffic on a Bus Rapid Transit route (BRT).

In addition, Daimler started a broad offensive in the field of electric mobility in all its divisions in the year under review. This includes the new plug-in hybrids from Mercedes-Benz Cars as well as the new electric smart models, the DENZA 400, which we have developed for the Chinese market together with our partner BYD, the new FUSO eCanter and also a completely new fuel-cell vehicle on the basis of the GLC with plug-in technology. The offensive also includes the concept vehicles Concept EQ, Mercedes-Benz Urban eTruck and Mercedes-Benz Vision Van, with which we are providing a very concrete view of the connected mobility of the future.

A key component of our growth strategy is systematic digitization. It is leading to far-reaching changes in society, in competition, with customers, and ultimately in everything we do. It is changing our products, our services, our customer contacts and the way in which we act within our company. It is also a trailblazer for new mobility concepts and allows the creation of new business models in connection with mobility and transport. In order to be at the forefront of this fundamental transformation, we are pushing forward with digitization at all levels, in all stages of the value chain, and with a clear focus on our customers. On the one hand, this is about the ever increasing connectivity of our products: with customer-oriented digital services, new business models and digital communication with customers – from the initial contact and through the entire customer relationship. Through the digitization of the entire value chain, we are able to shorten development processes and to make production more flexible and sales and marketing more direct. By making intelligent use of growing quantities of data and connecting all levels of value added, we are creating efficiency advantages, enhancing quality and facilitating further flexibility of the entire production process.

To make sure that we successfully undergo the transformation from automobile manufacturer into a full-range provider of innovative mobility solutions, we need new patterns of thought and action. Our goal is to combine the flexibility and risk culture of the digital industry with the perfection and innovative skills of our company. So together with the workforce, we are developing a new management culture under the roof of “Leadership 2020,” which will ensure our success also in the future. In this way, we are fulfilling the requirements of the digital world and creating space for cultural changes.

We are very well positioned for the upcoming challenges with our growth strategy, the digitalization offensive, innovative products and mobility solutions, high levels of investment in the future of the Group and the renewal of the corporate culture. We are on a stable growth path, which we will continue to follow systematically. We therefore look to the future with great confidence and continue to aim for further profitable growth.

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