Tesla's German rivals off to a good start in 2021, thanks to demand from China

Chip shortages are playing havoc with assembly plants but didn’t prevent German premium automakers from reporting double-digit gains in car sales for the first quarter.

Boosted by record demand in China, the BMW brand posted a new all-time high in sales volume for the first three months of the year, and Mercedes-Benz barely fell short of its own historic peak for the period.

The figures suggest a strong start for annual earnings and a continuation of the rebound from the final quarter of 2020. Pure volume, more so than net pricing or model mix, is typically the single biggest determining factor behind a manufacturer’s profitability.

“These record sales underline our ambitious growth targets for the year,” Pieter Nota, head of sales and marketing for the BMW Group, said in a statement on Thursday.

His company sold more than twice as many battery-electric vehicles and plug-in hybrids and is already on track to deliver its full-year target of 100,000 electrified BMW and Mini cars in the course of the second quarter.

Overall the BMW brand enjoyed a 36% gain in volume to 560,500 vehicles, while larger rival Mercedes recorded a 22% jump to over 581,300, only 13,000 units short of its previous first-quarter record from 2018.

China delivered the bulk of the growth, thanks mainly to a recovery from last year’s pandemic-related collapse in February sales. Both brands also posted strong double-digit growth rates in the U.S., their second largest individual market after China.

Mercedes indicated more might have been possible had it not faced production bottlenecks, the result of a global shortage in key semiconductor chips.

Mercedes said that it would “continue to monitor the situation closely” and that it remains in constant contact with suppliers; the company predicted further unquantified shortfalls from the first quarter would drag into the second one.

BMW said it had thus far suffered no such production cuts. “We placed our orders in time for this year’s required volumes and expect that our suppliers correspondingly deliver according to the contracts,” the carmaker said in an emailed statement to Fortune.

Under considerable pressure to reduce tailpipe emissions of carbon dioxide from their new cars in Europe, the German premium carmakers both emphasized that their rollout of battery-electric vehicles and plug-in hybrids was gathering steam, accounting for about a tenth of their respective global sales.

Nevertheless, their combined total of low- and zero-emissions cars across all brands—nearly 130,000 when counting BMW, Mercedes, Mini, and Smart—still fell substantially short of the 185,000 battery-electric vehicles delivered by Tesla during the first quarter.

As a result, BMW just added the Chinese-built iX3 electric midsize SUV to its European model range. Mercedes, meanwhile, began delivering the first units of its new EQA electric compact crossover only days ago: Some 20,000 have already been booked by customers, a “promising start,” according to the company.

This would represent a real boost, as the brand sold only about 6,300 electric passenger cars during the quarter.

Later this year, Mercedes will also begin selling the EQS luxury sedan, with a certified European range of 770 kilometers (478 miles). The series production version will be unveiled next Thursday.

“The EQS will be a real game changer,” pledged Mercedes sales chief Britta Seeger in a statement.

It will be positioned to rival the Tesla Model S, which is currently being refreshed to remain competitive after nearly nine years on the market.

Competing against upstart Tesla is not the sole motivation behind the launch of models like the Mercedes EQA or BMW iX3.

Carmakers in Europe have to meet strict CO2 targets when selling new cars. Fines are so punitive they have forced companies like General Motors to abandon the European market entirely, and brands are doing everything possible to accelerate the launch of electrified vehicles in order to remain compliant irrespective of Tesla.

Both German premium brands were able to meet their CO2 targets last year, thanks mainly to the rollout of plug-in hybrids like the BMW 330e xDrive and the Mercedes GLC 300 de 4MATIC diesel, which pair a combustion engine with an electric battery.

The technology is however heavily criticized by environmental advocates as empirical evidence has shown they are a lot less effective at reducing CO2. Many customers do not or cannot regularly charge the batteries and instead continue to run them on conventional fossil fuels.