Quarterly report Profit slump dampens mood at Mercedes

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The dependence on the Chinese market is leaving deep marks on Mercedes' balance sheet. As sales stall, the financial figures are hitting rock bottom. The future is full of uncertainties.

Mercedes-Benz experienced a significant drop in profits in the third quarter due to weakness in the crucial Chinese market. The results fell by about half, primarily due to the tough competition in the People's Republic and the generally weak economic situation affecting the passenger car business. "The financial results of the third quarter do not meet the standards we set for ourselves at Mercedes-Benz," said CFO Harald Wilhelm in a statement. He now plans to focus even more on costs and efficiency. The management had already significantly lowered profit expectations for the year in September. The stock declined.

Analysts, following the warnings, had already expected a significantly worse quarter. However, they had not anticipated that Mercedes would achieve only a 4.7 percent operating profit margin before interest, taxes, and special effects in its core passenger car business. A year earlier, it had been 12.4 percent. CEO Ola Källenius had set expectations for the experts at around a 6 percent margin for the second half of the year. Following the disappointment in the third quarter, CFO Wilhelm projected a margin of 6 to 7 percent for the fourth quarter during a conference call with analysts.

Mercedes is facing difficulties primarily in China, as the high-end models with the star emblem are not selling as well as anticipated, and there appears to be no improvement in sight for the current year. These expensive vehicles are a core element of Källenius's strategy and have driven the revenue margins of the Swabian company to record highs in recent years. However, with the economic downturn in the People's Republic, particularly in the real estate market, the affluent Mercedes customers have unexpectedly become more frugal.

Expensive discounts, weak demand

Additionally, competition from domestic automakers is growing in China, a country that has been a guarantor of growth for German manufacturers for many years. In the electric vehicle sector, which is expanding rapidly in China, Mercedes is still waiting for a breakthrough success with its models such as the EQS, the fully electric counterpart to the S-Class. In the third quarter, Mercedes spent a mid-three-figure million euro amount to reduce inventories of electric cars at dealerships through discounts and to support sales in China with subsidies, as Wilhelm stated.

The forecast reduction in September was already the second time this year that management had to temper earnings expectations. Ahead of the weekend, Mercedes accordingly also lowered the revenue expectations for the entire group and the sales expectations for the car division – both are now expected to be slightly below last year's level, instead of at the same level.

Earnings before interest and taxes (EBIT) dropped by almost half to 2.52 billion euros (approx. 2.73 USD) in the last quarter on a year-over-year basis, as reported by the DAX-listed company. Revenue decreased by 6.7 percent to 34.5 billion euros (approx.37.39 USD). The group's net profit fell by more than half to 1.72 billion euros (approx. 1.86 USD).

Declining sales in the third quarter

In the third quarter, Mercedes sold 503,573 passenger cars, which was 1.4 percent less than the previous year. However, the automaker was unable to achieve as high prices and sold a smaller proportion of more expensive cars, causing profits to plummet. Although the decline in van sales was greater, Mercedes was able to contain the drop in the operational results of the vans. The business with financial services and mobility services is also facing problems. Due to the general interest rate trends in the market, the company earned less from financing and leasing.

Mercedes performed better than expected in terms of free cash flow in the industrial business, excluding financial services. This metric is important for investors because, in addition to the regular dividend, Mercedes intends to use the available free funds for share buybacks. These are popular among professional investors because they theoretically increase the earnings per share and thus can support the stock price.