Mercedes-Benz cuts costs, renews focus on combustion engine models in bid to revive earnings

BERLIN: Mercedes-Benz on Thursday announced further cost-cutting and more petrol and diesel cars than EVs in its new product range, in a bid to revive margins as the company braces for a sharp drop in earnings in 2025.

The German luxury carmaker will release 19 new combustion engine models and 17 battery-electric cars by the end of 2027, in a sign of a renewed focus on its combustion engine offering after its battery-electric sales collapsed by a quarter last year.

Most of the new models will be in its top-end price tier, showing that the carmaker is still committed to its strategy of selling a lower volume of higher-margin vehicles, despite some investors and labour representatives expressing concern in recent months that the strategy had failed.

"The strategy of value over volume remains in place - it has not been abandoned," CFO Harald Wilhelm said, adding it was good news for its margin that combustion engine cars were still far outselling electric vehicles.

The carmaker will also localise more production in China and the United States, Wilhelm said, protecting itself from rising trade tensions including threats from US President Donald Trump of a 25% tariff on all vehicle imports from April.

Mercedes-Benz' forecast will underscore investor concerns about its ability to weather a tough global market, as German carmakers' longstanding success exporting cars and deploying its technological prowess are under threat from a more protectionist United States and Chinese EV rivals.

"Luxury and China simply isn't working, and both are vital to the Stuttgart-based car manufacturer's business success," said investment strategist Jürgen Molnar at brokerage RoboMarkets.

Bleak outlook

After a 30% slump in earnings in 2024, and 40% in its cars division, this year will see earnings fall even further, Mercedes-Benz said, expecting a rate of return in its car division of just 6-8%.

The bleak outlook is a sobering reassessment of the more optimistic vision it outlined at its last capital markets day in 2022 of an adjusted return on sales of up to 14% in good times and no less than 8% in difficult ones.

Europe's auto industry faces a swathe of challenges this year, with Volkswagen and other carmakers as well as component makers announcing deep cuts as executives warn that the region's energy and labour costs have become uncompetitive.

Mercedes-Benz plans to reduce production costs by 10% by 2027 and double that by 2030, beyond an ongoing plan launched in 2020 to reduce costs by 20% between 2019 and 2025.

It will not shut down plants in Germany, its CFO said on Thursday, but it will shift production of one of its models from its home market to its plant in Hungary, where costs are 70% lower.

It will also outsource areas from finance and human resources to procurement, and reduce the size of the workforce through not replacing workers who retire and negotiating voluntary redundancies, he added.

The carmaker's sales took a battering last year in its key markets of China and Germany, performing better than premium carmaker Audi but worse than BMW which bucked the trend with higher EV sales.

Mercedes-Benz will spend a significant amount of resources in the coming five years to grow its market share in China but will stay away from what CTO Markus Schaefer described as "irrational decisions" by competitors to cut prices.