Sales of luxury vehicles in the Wall of China are negatively impacting Mercedes-Benz's earnings
German automakers are grappling with slumping sales, particularly in China where revenues aren't improving the balance sheets. Mercedes-Benz is also experiencing difficulties, as the third quarter has proved disappointing, with hopes of improvement being minimal.
During the summer, Mercedes-Benz encountered a dip in profits due to weak sales of luxury cars in China. The EBIT dropped by nearly half, to 2.5 billion euros, from July to September compared to the previous year, as announced by the DAX company. In the core business of passenger cars, the adjusted operating result declined even more sharply by 64%, reaching 1.2 billion euros, resulting in a return on sales that was half of the previous year's (12.4%). Mercedes attributed the challenging market environment and intense competition, "specifically in China," as the main reasons for their struggles.
Chief Financial Officer Harald Wilhelm declared his intent to enhance efficiency and reduce costs. "The financial results of the third quarter do not match the expectations we hold for Mercedes-Benz," he stated. Despite the difficulties, a respectable cash flow was generated. The cash flow was slightly above the previous year's income at 2.4 billion euros.
Anticipated reduction in group profit by 15%
In September, the company adjusted its profit target for Mercedes-Benz Cars due to the weak quarterly result. The return on sales is now projected to be 7.5 to 8.5%, a significant drop from last year's 12.6%. The group's operating profit is predicted to shrink by over 15% this year, falling from approximately 20 billion euros the year prior. The sales outlook has also been revised downward; it is now projected to decrease slightly instead of achieving the previous year's level.
In China, affluent consumers are withholding purchases of expensive vehicles like the S-Class and Maybach due to the real estate market crisis, marking a shift in the sales mix from the previous year. Despite a nominal decrease in the number of passenger cars sold in the first nine months to 1.46 million vehicles (a 4.3% decrease), the operating profit plummeted by 44%, ten times as much. "Deteriorated pricing and an unfavorable product mix" and model updates are responsible for the income decline, as Mercedes explained.
Mercedes-Benz will not be able to reverse the trend in the fourth quarter - sales in the seasonally stronger period are anticipated to be at the same level as the third quarter. This means a slight decline for the full year, contrary to the Stuttgart-based company's initial expectation of a recovery in the second half of the year to maintain the 2023 volume.
The world's most significant and principal car market, China, where the prestigious brand sells every third car, was once a profit driver. Now, it serves as a hindrance. The Chinese government is attempting to stimulate the economy with a stimulus package. However, analysts doubt that this will be sufficient to help Mercedes and other German carmakers escape hardship. The car market is expected to remain fundamentally weak, according to analysts from Barclays. Mercedes, BMW, and Audi will likely have to lower their prices and will increasingly encounter Chinese competitors in their previously dominant segments, as per analysts from Bernstein Research. "We anticipate China to remain a challenging market."
Given the challenging market environment, particularly in China, the German automaker industry's economic situation is not improving. As a result, Mercedes-Benz has adjusted its profit target for Mercedes-Benz Cars, anticipating a significant drop in the return on sales and a shrinkage of the group's operating profit by over 15%.
