Risking an iconic brand — and $40b — in a race to go all-electric

OLA KÄLLENIUS: Climate change is perhaps the defining issue for our generation. You have to ask yourself as a business leader, what are we going to do about it? 

Every new vehicle architecture from Mercedes-Benz from 2025 forward will fundamentally be developed as an electric-only architecture. 

Let’s say for some reason it happens a little bit slower, that’s not so bad. But think about the other scenario. What if it does happen, and you were hesitant, and you didn’t go for it? That could be an existential threat. Yes, it is an incredibly ambitious plan to take a hundred-plus year old company and switch over industrially inside a decade or so. But at the same time, we have no time to waste here. 

BOB SAFIAN: That’s Ola Källenius, CEO of Mercedes-Benz.

With a global move toward EV transportation in full swing, Mercedes is ditching its historic combustion engine, seeking to go all-electric by 2030 and investing 40 billion euros in the effort. 

I’m Bob Safian, former editor of Fast Company, founder of the Flux Group, and host of Masters of Scale: Rapid Response. I wanted to talk to Ola because few companies are so clearly at the precipice of the old and the new as Mercedes.  

One of the world’s most prestigious and long-established brands, Mercedes is now looking to reinvent itself, by leaping ahead in the very modern race toward an EV future. That requires transforming the company’s products, but also its human talent. Ola has to evolve a huge workforce from combustion engine specialists to one that can expertly produce the vehicles of tomorrow.

As war in Ukraine and economic disruption have added headwinds, Ola has remained committed, focused on the long-term potential of a CO2-free industry. Leaning into Mercedes’ brand identity, he’s asking the tough question: what does a luxury automaker look like in an evolving EV world?    

[THEME MUSIC]

SAFIAN: I’m Bob Safian. I’m here with Ola Källenius, CEO of Mercedes-Benz. Ola, thanks for joining us.

KÄLLENIUS: Yeah, great to be with you, Bob.

Copy LinkWhy Mercedes-Benz announced plans to be all-electric by 2030

SAFIAN: In July of 2021, you announced plans for Mercedes-Benz to be all electric by 2030. You’d been CEO for about two years at that point, after a couple decades of working inside the company. But it’s a bold remaking to do that. Did you wake up one morning and say, “This is what we have to do?” What prompted this strategic shift?

KÄLLENIUS: It really goes back a couple of years before we made that announcement when we presented what we called Ambition 2039. And we did that in the spring of 2019, where we said the only way forward for our business or any business really is to go CO2 free. We got to have a plan to decarbonize our business. We came from the Paris Climate Agreement 2050 and took 10 years off of that. We need to be CO2 neutral across the whole value chain 10 years ahead of the Paris Climate Agreement.

That means not just the obvious thing, the product, it’s also about our supply chain, it’s about our operations, it’s about the product in use. If you make that not just that mental switch for your business, but also fundamentally a technological switch and a capital allocation switch, you got to put together a plan to back that up.

And the more time went on and the more we started to launch new electric vehicles and the more momentum was starting to pick up in the market, we were asking ourselves, “Even though 2039 for complete CO2 neutrality is still a very ambitious target, are we going too slow on the product?” And we came to the conclusion that it might happen faster. In a situation like that, you don’t want to be the company that sits back and waits. You really want to be on the forefront of the new movement, and hence upping the ambition in terms of the product side to put the company in a position by the end of this decade to go full electric.

SAFIAN: Earlier that year, GM had made a proclamation of going all electric, but they were putting 2035. You’re taking five years off of that time, nine years off of your initial target. For a company that’s been around for 130+ years as Mercedes-Benz has and is trying to embrace this whole new approach in this short time, it’s a little crazy to try to do it that fast. Did it feel like you were out on the brink to make this decision to push that timeline so close?

KÄLLENIUS: Maybe there is too much focus on this year or that year. I think we should talk more about technology, market adoption, and also capital allocation. What do you need to do to be able to achieve that very high ambition? We made a very important decision, which is that every new vehicle architecture from Mercedes-Benz from 2025 forward will fundamentally be developed as an electric only architecture. Which means that the capital allocation from that point forward goes more or less all electric.

Your engineering resources, your whole company, everything you do starts pivoting. Vehicle architecture for car companies, usually you put several models in the market for maybe 10 years or so. You will have a coexistence still of the architectures that you’ve had before, but from that point forward, it’s almost like you put a sand clock on the table, and the sand starts going down. You have made a fundamental decision that you’re going to switch over. With that decision, we will, by the end of this decade, have a complete lineup.

Every single model from top to bottom will have a fully dedicated electric version, and we’re industrializing for that as well. For the markets that are ready, we will be ready to go. If some markets are a little bit slower and that bleeds into the 30s, 30+ x, I think it’s beside the point. The important things are: Are you developing the technology? Are you putting your capital resources behind those technology choices? And do you get your whole organization and the whole mindset of the company in this direction?

Let’s say for some reason it happens a little bit slower, because the infrastructure is maybe not ramping up as fast. That’s not so bad. You still have a coexistence of both technologies in the market. You could go on for a few years longer. But think about the other scenario. What if it does happen, and you were hesitant, and you didn’t go for it? That could be an existential threat for an incumbent producer. I think that yes, it is an incredibly ambitious plan to take a hundred-plus year old company and switch over industrially inside a decade or so. But at the same time, we have no time to waste here. There’s really a “let’s go” atmosphere inside the company to move forward into this new CO2-free and frankly speaking, technologically-more-exciting future.

Copy LinkThe business- and principle-based decision for Mercedes-Benz to be all-electric

SAFIAN: We had a guest on the show who talked about the difference between what he called business decisions and principle decisions. And as you described this so far, it sounds like very much this was a business decision. Like, “this will be better for the long term sustainability of Mercedes-Benz as a business.” But are there principle decisions that are part of it also? Is there a moral element to embracing this?

KÄLLENIUS: I think there is something bigger than just the business decision. We know that climate change is perhaps the defining issue for our generation. The risk that climate change could lead to a world that we don’t want to see. Then you have to ask yourself as a business leader, or as any citizen, so what are we going to do about it? Who’s going to fix this problem? In the end, a large part of the fixing of the problem is going to end up on the desk of our engineers. That is where it’s happened.

We don’t want to abolish mobility, obviously. The gift that the founding fathers of this company Gottlieb Daimler and Karl Benz gave humanity in inventing the automobile, we have gotten used to that freedom. We can go wherever we want, whenever we want, but we need to get rid of the side effects. That overriding principle of climate change and CO2 needs to be solved. But I believe it is the better business decision. If we go through all industries, if we in the next decades find a way to dampen the effect of climate change, decarbonize all our businesses, that’s risk mitigation. That will be, for the whole world, the better business decision.

Copy LinkHow Mercedes-Benz CEO plans to transform the company to all-electric by 2030

SAFIAN: Making the transition to EVs, as you mentioned, is about product, and technology, and the marketplace. But it’s also about your people. You have 170,000 employees trained to work on combustion engines. You can’t just fire them and swap them out. You’ve said you plan to retrain and re-skill. You’ve set aside, I think, 1.3 billion euros for it. How do you make that kind of transition happen and happen at scale?

KÄLLENIUS: As much of an upheaval as this is for our company, at least in the powertrain area, this has been one of the positive experiences over the last three years, that the team is really on board. Even the people that work directly today in the area where high tech combustion engines or transmissions are being made, if you ask those people, “Should we go into an all-electric future?,” you would find the overwhelming majority, almost everybody, saying, “Yes, we got to do this.”

And the principle is simple there. You don’t want to work for a company with a great tradition. You want to work for a company with a great future. In engineering, we have created a joint drivetrain engineering group where the people that used to work on combustion kind of meander into the electric side, and they work hand in hand. And I’ve seen a tremendous amount of willingness for learning new things, moving into new technologies, being curious about what’s going on in that space. I think the switch inside the company has gone much faster, is going much faster than we might originally have thought.

SAFIAN: I know at your Berlin production facility, you set up a digital factory campus, which includes training staff to be software developers.

KÄLLENIUS: So here we had one of our plants. The oldest operating plant of Mercedes in the world, it was virtually 100% dedicated to combustion engines. And we’re completely transforming that site to become what we call the digital factory campus, and at the same time, we’re also going to build our high performance electric motors at that site as well. And one of the people in HR came up with the idea, “Why don’t we offer people to train to become junior software engineers, almost no matter what background they have? Whether they have worked on the line or in administrations.”

When I heard the idea, at first I felt, “Is it really realistic?” And I was there a couple of months ago when we opened this digital factory campus, and I met the first graduating class from these junior software engineers. And I was blown away. They had actually done this. I could also see how enthusiastic they were. These are people that have taken a considerable amount of their own spare time to learn this. And most definitely, this will be one of the role models for transformation in the company. We’re putting considerable means and resources behind a re-training effort not only to go electric, but also to go digital.

SAFIAN: A transformation of this scale, it’s expensive, right? I think you’ve said it’s going to require something like a 40 billion euro investment before the end of the decade. I know the company spun off its truck business as a separate entity, Daimler Trucks. Was part of that to sort of unlock resources for this transformation? Or how much of it was about just the impetus to be a more focused, streamlined company in this environment?

KÄLLENIUS: We have the one-year anniversary of this spinoff in a couple of weeks’ time, and it’s kind of a bit of both of what you mentioned. On the passenger car side, we sell a combination of luxury and tech cars to mostly private individuals, whereas on the truck and buses side, it’s very much a total cost of ownership-driven business. You don’t buy a class A truck because you want to drive it for fun. You do it because of a business reason. So you have fundamentally different customers, but we also wanted to unleash entrepreneurial energy in the company, focus the businesses, not be a conglomerate.

We are also thinking about the financial aspects of it. Usually in a stock where you have two different industries, or two industrial divisions inside a stock, you have a conglomerate discount. And we could see that when we listed Daimler Truck separately, that some of that conglomerate discount went away, which is good for our shareholders.

So focus is very, very much part of the story, and indeed the internal name for the project was actually Project Focus. In terms of capital, in our case, we have to be our own venture capitalist. The auto industry is extremely capital intensive, and the most intensive face is coming now in the next years where we are going all-in on electric and digital. So different from the start-ups here, we have to produce our own cash flows to finance these tens of billions that we’re pouring into this. That is why financial discipline, combined with this curiosity and can-do attitude for new technology, is just as important. We didn’t have to do the spinoff to get capital to fund our R&D. That can be done through the individual industrial businesses themselves.

SAFIAN: Since you announced this reshaping, we’ve seen a lot of shifts. We’ve seen war break out in Ukraine with lots of repercussions. Now we’re seeing inflation and concerns about slowdown. What does that environment do to your plans? How does that impact the way you’re operating?

KÄLLENIUS: The external business environment, especially in the last two to three years, has been extremely challenging. It feels like not one black swan, but I don’t know, two or three black swans coming at the same time. So with semiconductor shortages, of course the terrible war in Ukraine with the impact on the energy sector for Europe, but particularly for Germany, it’s like you’re in constant task force mode. You’re dealing with this debt or the other.

But that should not disrupt the effort of the overall transformation. So the speed and intensity of the R&D project, it’s not like we peel those back while we’re waiting to solve some of the most operational issues. It’s going on in parallel, sometimes you have the feeling you live in two worlds — in the here and now, full of task forces and challenges, but also in the future, the bigger issue, transforming the company into a complete new era. And it is that second piece that is the most important, of course, in the long term.

[AD BREAK]

SAFIAN: Before the break we heard Mercedes-Benz CEO Ola Källenius talk about his 40 billion euro bet on electric vehicles, what it means for his products and his people. 

Now he talks about what makes a luxury business different from a mass brand, about balancing volume with desirability, and the particular challenges posed in China. 

Plus, he shares leadership insights about running a company like a quarterback, and the need to sometimes call an audible. 

And he offers a peek into Formula One, which he calls “the fastest lab on earth.”

Copy LinkTurning Formula One to CO2 neutral

SAFIAN: So you’ve made all these bold steps towards all-electric. But you’re a fan and supporter also of Formula One, where the vehicles are decidedly not electric. Is that a disconnect?

KÄLLENIUS: Formula One is the pinnacle of motorsports. And in fact, the Mercedes brand was born on the racetrack. This we have discussed with the Formula One management, with Greg Maffei, who runs Liberty, who are the commercial rights holders of Formula One. And he and I share the exact same vision: keep and grow this most exciting asset, but turn it CO2 neutral. So Formula One has a plan to go CO2 neutral by the end of the decade. Our team is going to do it quicker.

The next powertrain regulations that we have just signed off on will significantly increase the electrical part of the powertrain, but will also be the lab for CO2 free fuels. So fuels that we’re going to need for aviation, for heavy shipping, and maybe for the car part for cars as well. So there, Formula One plays a technical role in moving the game on.

Sometimes I call it the fastest lab on earth. There’s no place where innovation happens so fast like in Formula One.

SAFIAN: So over the last year, you changed the name of the company from Daimler to Mercedes-Benz. The explanation in part was to differentiate from the new truck company, Daimler Truck, but I’m sure there were branding reasons behind it as well, because you’ve leaned into a real luxury market positioning. What about the luxury market do you find compelling? And is it particularly compelling when you’re looking at the transition to electric vehicles?

KÄLLENIUS: It’s really part of our DNA. It’s where the company comes from. If you take a walk through the Mercedes-Benz Museum, which is here right next to our headquarters in Stuttgart. You walk in a circle through the decades of automotive. It’s really two things that stick out. It’s innovation and technology. But the other part is something special, something desirable, something beautiful.

You see cars of Hollywood movie stars, like what did Clark Gable drive? You see the Gull Wing, I mean, really the sports car of the 20th century. You see Lady Di’s SL that I saw again now that I started watching the final season of The Crown. The original car that Lady Di drove is in our museum.

So tech and luxury feels natural as we go through transformation. You also have to ask yourself where do you play? Not just what do you do technologically, but where do you play? Let’s play to the strengths of the Mercedes-Benz brand.

SAFIAN: In Germany, I understand the word luxury isn’t necessarily appealing to consumers the same way it is in the United States, but the idea of luxury certainly is.

KÄLLENIUS: Absolutely. Look at German industry. Not seldom do you find that German company making the technologically most sophisticated product and also maybe a little bit understated but true luxury products. So in a quiet way, even if you don’t use the L word here, everybody knows what we’re talking about. This is one of the strengths of German industry for such a long time. And Mercedes is one of those companies. I think we’re the original luxury company in the auto industry.

SAFIAN: Most big German companies have been run by German CEOs. You’re not German. I’m curious how that’s different for you. Do you have a different leadership style?

KÄLLENIUS: I think every person has their own management style. Is there some piece of Swedish Nordic trait in there? Yeah. Everybody in Sweden is on a first name basis, so you don’t address people necessarily with Mr. Källenius, you say Ola. So there are maybe some smaller things like that, but I think every single leader has to be authentic in their leadership style and not try to imitate somebody else.

Copy LinkHow working in the U.S. has influenced Ola Källenius’ leadership style

SAFIAN: I know you spent a bunch of years in Alabama working for the company. Apparently you follow American football, Crimson Tide, if I have that right. How has working in the U.S. influenced your approach to business?

KÄLLENIUS: I came to Alabama early in my career when we had made the decision to build the first full-scale passenger car plant, really outside of Germany. And it was clear that it was going to be the SUV segment. And I had actually played American football, during my high school and university years in Sweden. So I was a football fan before I came to Alabama. And this was a lucky coincidence that you end up in football heaven.

I think I learned a tremendous amount of things being part of that pioneering team, setting up that plant. And we all know that in the U.S., there’s always such a positive can do attitude. In the south, the southern hospitality’s legendary. And yes, I’m an absolute diehard Crimson Tide fan, so I try to watch as many games as I can.

SAFIAN: When you played football, I understand you were a quarterback. Now you are essentially the quarterback at Mercedes. How important is the quarterback to a successful team?

KÄLLENIUS: I think we should emphasize, it’s a team sport. So very much like football, automotive is the ultimate team sport. Everybody has a role and in a coordinated way, each person performing their role is what makes it click. But the quarterback has to be the one calling the plays. And if things happen, you have to be prepared to call an audible. You watch the defense change their positioning or something happens in the market environment, don’t be afraid to tune your tactics and strategy as you go along.

Copy LinkWhy Mercedes-Benz cut prices in China

SAFIAN: I noticed you called an audible recently in your China business that there was a big price cut there recently, which I guess the luxury emphasis on EVs in a sense doesn’t translate as well or in the same way in the Chinese market. Is that what prompted this shift?

KÄLLENIUS: Over the last couple of years, we have had tremendous pricing power and built upon that, driven by a demand that has exceeded supply.

With regard to two of our electric sedans in China, maybe when we positioned them, we were a little bit too optimistic. So what we did is we brought them more in line with what the pricing is for those two models around the world. It’s like when you buy a luxury handbag, whether you buy it in Shanghai, you buy it in Paris, or buy it in New York, most luxury companies try to have about the same pricing around the world. So yes, we made a correction there. And then it is also true that in the Chinese market, the upper end of the battery electric vehicle segment is still in its infancy. It’s just developing. And we’re going to put more and more products in there and see how the market progresses over the next years.

Copy LinkOla Källenius on the differences in operating a luxury brand and a mass brand

SAFIAN: What do people most misunderstand about the difference between operating a luxury brand like Mercedes-Benz and a mass brand?

KÄLLENIUS: If you are a blend of luxury and tech like we are, desirability is important. You have to have the technology. But you also have to have the aesthetics, those little special features, also sometimes the X factors, whereas our volumes are for a premium luxury manufacturer, relatively high, 2 million. We’re not Ferrari with 10,000 or something like that. We still try to be very, very careful with how we go to market and that you don’t end up pushing your product into the market, but work with pull.

SAFIAN: And so you’d rather have not enough product in a market than too much to be able to reinforce that desirability?

KÄLLENIUS: There is the old saying that you should always sell one less than demand to keep that up. And I think there’s a lot of truth in that. You have special products in your portfolio like the G-Wagon, the G-Class. It is so desirable.

But even on some of your more volume models, like a GLC or a C-Class, yes, you have to make sure that you feel that you’re a half a step above. And if the market goes softer, you have to be prepared also to take some volume out and move down with the market. The key to be able to do that is to have a break-even point for this extremely capital-intensive business, that is not too high.

We have been working over the last three years to lower the fixed cost, lower that break-even point, so we can have a reasonably strong profitability, even at lower volumes. Then, you are not in the position that when the market goes soft, that you still have to keep your factories running at too high of a utilization just to get the metal out and that then ruins your pricing again.

We divide our portfolio into three general segments. What we call top-end luxury. That’s where you find the S-Class, the GLS, the AMGs, the Maybachs; then we have the core, the E-class and the C-class.

And then we have an entry where you find the CLA, GLA, and the GLB. What we have decided is that at the entry offering we’re going to trim the portfolio. Today we offer seven models. And in the next generation we’re going to go down to four. But then, where we are a market leader at the top end, we see growth potential. And indeed that is also the most profitable of your overall product portfolio. So we are going to nudge upwards as opposed to going downwards.

SAFIAN: So what’s at stake for a Mercedes right now?

KÄLLENIUS: Well, in a transformation of any business, I think everything’s at stake. History tells us that when a technology comes and replaces another technology, an industry is put on its head. So just because you’ve had a very, very long time of success, it’s not like you can sit back. You have to have a totally different attitude. It’s almost like you go back to 1886 again and say, “We’re starting over. The game is starting over.” We have to reinvent ourselves.

I call it reinventing the original invention. There is everything to play for. We can be in a strong or even stronger position 10 years from now than we are today. But not by sitting back and taking this for granted. Put on the entrepreneur hat, roll up your sleeves, and get going.

SAFIAN: Well, Ola, this has been great. Thank you so much for spending time with us.

KÄLLENIUS: Thanks for having me.