Economy Mercedes-Benz under triple pressure

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Things are not going well at Mercedes currently, with the manufacturer making headlines for cost-cutting rounds. After several prosperous years, the proud automaker is struggling with three major issues.

The car crisis has reached Mercedes-Benz. Profit slump, sales decline, cost-cutting—the prosperous years are over. On Thursday, the automaker plans to present its financial figures for 2024. It is clear that the DAX-listed company is falling short of its own high standards. What are the reasons for this?

Demand crashes in China

"China was the growth engine," says auto analyst Frank Biller from Landesbank Baden-Württemberg (LBBW, a state bank in Germany). More than a third of all Mercedes passenger cars went to China in recent years. In 2024, sales dropped significantly by seven percent. "There were particularly significant slumps in the higher-end vehicle segment," says Biller. However, it is mainly with these cars that high profits can be achieved.

Mercedes

Källenius cuts costs: billion-euro savings targets due to sales crisis

Sales in the "Top-End" segment—which includes Mercedes-Maybach, the S-Class, or the sports car subsidiary AMG—decreased by 14 percent overall last year, which Mercedes attributed in part to market conditions in China. In China, the real estate crisis has particularly led to the loss of customers who buy premium vehicles, says Stefan Reindl, head of the Geislingen Institute for Automotive Economics. Additionally, the competition intensity from local brands there has increased enormously.

Limiting luxury strategy

Mercedes has never been a mass manufacturer, says LBBW analyst Biller. He considers Mercedes' focus on premium and luxury vehicles to be the right approach. However, "I don't find it plausible for Mercedes to position itself as a pure luxury manufacturer." Although there are models that can claim the luxury attribute for themselves, with the current profit margins, Mercedes is "far from being a luxury manufacturer." In the third quarter of last year, the adjusted sales return on passenger cars was a meager 4.7 percent. In the same quarter of the previous year, it was still a good twelve percent.

"Mercedes loses the scaling effect due to the luxury strategy," says auto expert Ferdinand Dudenhöffer. Fixed costs cannot be spread over larger volumes. The risk of a luxury strategy is that the portfolio is not as balanced. If things don't go well in that segment, there is a relatively steep decline, says Dudenhöffer.

Electric energy fizzles out halfway

In its electric strategy, Mercedes has backtracked "after sales fell significantly short of expectations," says analyst Biller. Sales of all-electric cars fell by 23 percent to 185,100 vehicles last year.

In recent years, Mercedes CEO Ola Källenius rarely missed an opportunity to showcase the company's electric ambitions. "Electric only" was the motto. The passenger cars were to be fully electric by the end of this decade—where market conditions allow. However, just over a year ago, Källenius struck a new tone and emphasized the "strategic flexibility" of internal combustion engines. The transition to electric cars might not be as rapid after all.

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