Mercedes cuts costs and invests to prepare for challenging years

Yesterday, Mercedes-Benz revealed plans to cut costs by several billion euros or 10% by 2027. Car production will be reduced from 2.5 million units to ±2.2 million in 2027. At the same time, the company wants to become “leaner, faster, and stronger”.

Group earnings before interest and taxes (EBIT) reached €13.6 billion (2023: €19.7 billion), and group revenues came in at €145.6 billion (2023: €152.4 billion). The free cash flow from the industrial business reached €9.2 billion (2023: €11.3 billion), mainly due to a very high cash conversion rate at Cars and Vans.

The adjusted EBIT at Mercedes-Benz Cars fell to €8.7 billion (2023: €14.3 billion) on lower volumes, particularly in China, negative net pricing, and an unfavorable model mix. The adjusted Return on Sales (RoS) in 2024 was 8.1% (2023: 12.6%). Research and Development costs remained high due to investments in future platforms and technologies.

The 4% reduction in sales had an impact because the decrease occurred in the brand’s higher luxury segments (-14% in sales). That’s why the RoS dropped to 8.1% while still 14.6% in 2022. This operating margin is supposed to fall even lower this year (6 to 8%). And the eventual higher US import tariffs aren’t considered in these prognoses.

In 2019, Mercedes already launched an austerity program that reduced costs by 20% and focused on the higher luxury segments. The latter didn’t work out entirely as expected, and it was also due to receding sales figures in China.

Increase efficiency

“Mercedes-Benz Group delivered solid results in a very challenging environment thanks to a range of outstanding products and strict cost discipline,” said Ola Källenius, CEO of Mercedes-Benz Group AG.

“To ensure the company’s future competitiveness in an increasingly uncertain world, we are taking steps to make the company leaner, faster, and stronger while readying an intense product launch campaign for multiple new vehicles, starting with the all-new CLA,” he added. 

“We have to intensify efficiency measures at all levels facing tough market conditions in the near future,” said Harald Willem, Mercedes-Benz’s CFO. The cost-cutting plan doesn’t involve factory closings, but Mercedes could delocalize part of its German production to Hungary “because costs are 70% lower over there.”

A decrease in personnel is possible, but mainly through early pensioning and voluntary departing. Currently, Mercedes-Benz employs some 166,000 people worldwide, most of them in Germany. Also, the sales of EVs cause worries. In 2024, Mercedes only sold 185,000 BEVs, 23% less than in 2023 and less than half of what its Munich competitor, BMW, realized last year.

Transformation started with the new CLA

As a result, Mercedes-Benz is preparing its biggest-ever product and tech launch campaign, with dozens of new or refreshed models until 2027. To achieve this, it wants to introduce “a coherent, status-oriented design language across the entire portfolio” and raise ” Mercedes-Benz’s competitiveness and resilience.”

“As the custodians of this iconic brand, we ensure that Mercedes-Benz continues to leverage its full potential. We’re launching the company’s biggest-ever product and tech campaign and a comprehensive performance enhancement program,” said CEO Källenius.

The all-new CLA, which will be offered as both a BEV and an ICE variant, is the first big step in this direction. “The concept provides drivetrain flexibility in the form of a pure electric car with benchmark range, consumption, and charging performance, in addition to a highly efficient ICE variant using small transverse high-tech electrified engines,” Mercedes promises.

Beginning with the all-new CLA this year, Mercedes-Benz will start the most intense product launch program in its history. This includes the major upgrade of the S-Class in 2026 and a string of launches at Mercedes-AMG. Overall, Mercedes-Benz plans for dozens of new or refreshed models to reach markets by 2027.

Mercedes-Benz will close its electric core segment gap by launching all-new electric GLC and C-Class models. An all-new, fully electric E-Class will round out the picture.

“Market conditions, infrastructure, and customer needs will continue to determine the pace of BEV adoption. Boosted by new BEV model introductions, the Mercedes-Benz Group AG is targeting an xEV share of more than 30% in 2027,” says the press release.

“We will excite our customers with a full rollout of uncompromising cars,” said Markus Schäfer, board member and Chief Technology Officer. “They will be an intelligent part of their life. They all come with a fully integrated tech stack and leverage the latest developments in AI. They will be packed with advanced technologies like the latest ADAS systems and innovative tech features like a new steer-by-wire system.”

“It all starts very soon with our new CLA, our first software-defined vehicle powered by our very own in-house operating system, MB.OS. Our new electric GLC, a turning point in our mid-size segment, will follow it. This is the all-electric SUV our customers have been waiting for,” he added.

Investments up, fixed costs down

Investments are expected to peak in 2025 due to the massive product launch plan and will ease from 2026 onwards. The majority of investments will be for the CLA family of vehicles, the electric GLC, C-Class, and AMG.EA models will be completed by 2027, with products on the road.

Investment in combustion engine technology will remain limited, thanks to a reduction in powertrain complexity and intelligent modularisation between BEV and electrified high-tech ICE products. Mercedes-Benz developed and designed the highly efficient four-cylinder engine for the all-new CLA and is industrializing it with a partner in China.  

Mercedes-Benz achieved a 19% reduction in fixed costs between 2019 and 2024, net of inflation. Over the next three years, an additional reduction of more than 10% is being targeted.

“To ensure that the company can weather an even more dynamic geopolitical environment and challenging markets, efficiency measures are being intensified across the board. Paired with strong product substance and our product launch plan, Mercedes-Benz is well positioned to recalibrate its operating point and to return to double-digit margins in the near future,” concludes CFO  Harald Wilhelm.