Mercedes cuts revenue outlook as China luxury slump deepens

[STUTTGART] Mercedes-Benz Group expects lower sales this year due to weaker demand in China, where a prolonged property slump is undermining consumer sentiment and curbing demand for luxury vehicles.

The carmaker now sees group revenue slightly below the prior-year level having previously expected it to be unchanged. German peer Volkswagen last week also walked back its outlook because of weaker-than-expected deliveries.

The downturn in China is adding to pressure on chief executive officer Ola Källenius, whose push to take Mercedes further upmarket has made the company more dependent on wealthy buyers just as that country’s economy is losing momentum. Mercedes’ sales in the world’s biggest car market plunged 30 per cent during the second quarter, outpacing an overall market drop. 

For the second quarter, adjusted operating earnings from carmaking slumped 26 per cent from a year earlier to 909 million euros (US$1 billion). The average selling price fell to 64,700 euros from 67,700 euros a year earlier, underscoring the pressure from weaker pricing and product mix.

The company kept profitability guidance for the cars unit at 3 per cent to 5 per cent, after the margin came in at 4 per cent in the second quarter.

Mercedes-Benz Vans offset some of the broader weakness in cars, posting an adjusted return on sales of 10.2 per cent. The business is benefiting from steadier demand from commercial customers that need to renew their fleets, as well as recurring revenue from maintenance and other aftersales services.

The challenging first half puts the focus on the remainder of 2026, when the Stuttgart-based company expects a boost from new products. Second-half sales will be supported by models including the facelifted S-Class, the new electric GLC SUV and updated GLE and GLS models.

Mercedes also raised its forecast for electrified vehicles to account for 23 per cent to 25 per cent of car sales this year, up from 21 per cent to 23 per cent, supported by models including the electric CLA and GLC. That’s welcome news after models including the EQS, EQE and electric G-Class undershot internal expectations, raising concerns about the appeal of Mercedes’ electric cars.

With demand weak, Mercedes is pursuing cost reductions and efficiency gains. While agreements rule out compulsory redundancies at its German plants until 2035, the company has been using voluntary severance programmes to reduce headcount. General administrative expenses fell 14 per cent in the quarter, while research and development spending declined 12 per cent following last year’s investment peak for Mercedes’ product-launch plan.

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Källenius said Mercedes will focus in the second half on rolling out additional new models and pledged more cost cuts and productivity gains.

BMW and Mercedes are battling a fierce price war in China that’s undermining profits. Even their latest products including the electric CLA sedan struggling to compete with local models that offer more gadgets and options to buyers.

Last month, luxury peer BMW cut expectations for the year, partly because the ongoing Middle East war is increasingly deterring consumers, compounding the downturn in China.

VW last week followed BMW by cutting its revenue outlook after sales in China deteriorated, though it retained its margin forecast and said earnings should improve in the second half. The warnings show how Europe’s automakers are being squeezed by faltering demand, stronger local rivals, trade barriers and geopolitical upheaval.

The pressure is especially acute for Germany’s premium manufacturers, which relied on China for years of growth and some of their richest margins. As that market turns against them, their strategies, cost bases and exposure to luxury buyers are coming under mounting scrutiny.

Mercedes also raised 417 million euros from the first sell-down of its remaining Daimler Truck stake, helping support industrial free cash flow of 1.1 billion euros in the quarter. BLOOMBERG