Mercedes slashes outlook in latest blow to German industry

FRANKFURT: Mercedes-Benz Group AG cut its financial forecast due to a rapid deterioration of its business in China, marking the latest blow to Germany’s struggling industrial sector.

Adjusted returns in the main cars unit are now expected in a range of between 7.5% and 8.5%, compared with a prior forecast of as much as 11%, the company said late Thursday.

China, the company’s biggest market, has lost further momentum with wealthy buyers putting off purchases of Mercedes’ most expensive models like the S-Class and Maybach sedans.

The downgrade "was triggered by a further deterioration of the macroeconomic environment, mainly in China,” Mercedes said, citing "weaker consumption as well as the continued downturn in the real estate sector.”

The profit warning is the latest setback for Germany’s most important industry struggling with a bumpy transition to electric cars and waning profits from China.

Volkswagen AG, the continent’s biggest automaker, this month scrapped a decades-old labour pact and is poised to close domestic factories in Germany for the first time due to lagging demand.

BMW AG last week cut its full-year earnings guidance, led by the downturn in China and sluggish EV sales.

Earnings before interest and taxes are now expected to be "significantly below” the prior year level, Mercedes said, a setback to the company as it pursues a luxury strategy with more sales of its most luxurious vehicles to boosting profitability.

RBC automotive analyst Tom Narayan said the magnitude of the profit warning was a surprise.

"We would expect shares to react negatively,” he said in a note.

For Mercedes, weakening sales for its top-end cars marks a blow to a luxury strategy that’s meant to help fund its transition to an all-electric future and underpin returns.

Catering to more affluent consumers was meant to protect sales from dips but the strategy has struggled in practice.

Worsening matters, the company’s latest electric vehicles have met with a tepid response from consumers in Asia’s powerhouse economy and elsewhere.

Younger customers in China are increasingly turning to homegrown brands that are perceived to have more advanced in-car digital and entertainment technology than premium German brands like Mercedes.

While business in China slides, sales in Europe are also under pressure. Mercedes deliveries across the region slumped 13% during August and are down 3% during the first eight months.

Cratering EV sales are undermining carmakers’ strategies on meeting tightening CO2 rules from next year in the European Union, exposing the industry to billions of euros in fines.

Economy Minister Robert Habeck is holding an industry summit in Berlin Monday to discuss ways out of the current crisis.