Mercedes-Benz abruptly lowers profit forecast over weak China sales

Luxury automaker Mercedes-Benz has revised its annual profit target downward for the second time this year, citing a challenging economic climate, particularly in China. This revised forecast follows a similar downgrade earlier this year due to weak second-quarter results. As the headwinds for German car makers grow stronger by the day, Berlin has set up a crisis meeting to help its ailing car industry.

The primary driver behind Mercedes’ adjustment is a “deterioration in the macroeconomic environment,” especially in China, where weakened consumer spending has impacted sales, including those in the premium segment.

As a result, Mercedes-Benz expects its automotive division’s operating margin to hover around 6% for the year’s second half—a significant drop from the 14.6% margin recorded in 2022 and 12.6% in 2023.

Drop in stock quotes

Overall, the group’s operating profit, including its van production and banking operations, is projected to be “significantly lower” than last year’s €20 billion, after forecasting only a slight decline. This announcement triggered a noticeable drop in Mercedes’ stock quotes (-8%).

Analysts have noted the suddenness of Mercedes-Benz’s announcement. “While some investors expected a profit warning, the scale and lack of prior cautious comments were surprising,” said Tom Narayan, analyst at RBC Capital Markets.

Rumors surfaced of a possible Volvo scenario for a weakened German premium carmaker, where a Chinese candidate might gain complete control in a take-over. As Geely already is Mercedes’ largest private shareholder, it’s a more likely candidate than nationally deeper-rooted Volkswagen, for example.

BMW also issued a warning

Mercedes isn’t the only car maker issuing a profit warning. Last week, BMW released a similar warning, also citing a decline in China sales and a recall affecting 1.5 million vehicles due to a braking system issue.

That problem is, however, temporary and attributed to a supplier’s fix. BMW now expects its automotive division’s operating margin to be between 6% and 7%, down from the previous 8% to 10%.

The challenging Chinese market, which is the biggest for most premium brands, comes on top of the electrification woes. Operations are transforming from ICE to BEV, and electric car sales in Germany have crashed over the fallout of incentives. Meanwhile, the EU is imposing huge fines next year if these car makers don’t meet their CO2 targets, for which they desperately need sufficient electric car sales.

Berlin to open its wallet for Volkswagen?

The dip at Mercedes is one more sign that the German car industry is in distress, growing stronger every day. Especially the news that Volkswagen might shut down car factories in its home country for the first time in its history has caused ripples at the Reichstag in Berlin.

Media outlet Manager Magazine released redundancy numbers for the workforce from Wolfsburg as high as 30,000 (one out of four at Volkswagen), but top management has denounced these numbers as “crazy.”

German Economy Minister Robert Habeck has called an automotive summit today, bringing together manufacturers, unions, and suppliers to discuss the industry’s current crisis. He intends to reignite electric car sales by implementing new purchase incentives.

While he highlighted during a factory visit last Friday that Volkswagen is responsible for its own health check and reforms, he doesn’t exclude that Berlin will open up its wallet to help the ailing car maker.

The car industry in Germany has an annual turnover of 564 billion euros and represents 5% of the country’s Gross Domestic Product (GDP).