Business

Mercedes-Benz Slashes Profit Target Again, Blaming Slowing China Market

Mercedes-Benz has joined a growing chorus of automakers facing headwinds in China,cutting its full-year profit margin target for the second time in less than two months. 

The news sent the German luxury carmaker’s shares tumbling 7.5% to their lowest point in nearly two months, dragging down European car stocks as well.

“There is a tremendous amount of cautiousness,” said CEO Ola Kaellenius in a call with analysts following the announcement. 

“I’m trying to say this diplomatically,” he added, acknowledging the challenging environment in China.

“It was not surprising that spending for expensive capital goods was pared back.”

China’s slowing economic growth, driven by weaker consumer spending and a downturn in the real estate sector, has significantly impacted the luxury car market. 

This prompted Mercedes-Benz, headquartered in Stuttgart, to adjust its 2024 earnings outlook for both its car division and the entire group.

“How long will [weak demand in China] go on? I don’t know, but I remain cautious for the foreseeable future,” Kaellenius cautioned.

The revised outlook reflects the continued weak demand for luxury cars in China. Mercedes-Benz Cars now expects an adjusted return on sales to be between 7.5% and 8.5% in 2024, down from the previously forecast range of 10% to 11%.

This implies an expected adjusted return on sales of around 6% for the second half of the year.

As a result, Mercedes-Benz Group’s earnings before interest and taxes (EBIT) are now projected to fall significantly below last year’s level of 19.7 billion euros ($22 billion).

 This revision came after earlier forecasts anticipated only a slight drop. Analysts at LSEG now estimate the group’s EBIT to come in at 15.83 billion euros.

“While some investors had been anticipating a profit warning,” said RBC analysts, “we still view this news as a surprise,especially given the magnitude and lack of cautionary commentary ahead of today’s news.”

Mercedes-Benz isn’t alone in facing difficulties in China. Last week, BMW also flagged ongoing muted demand in the country, highlighting the broader challenges automakers are facing in the world’s second-largest economy. 

The group’s industrial business is also expected to experience a significant drop in free cash flow compared to the previous year.

Boluwatife Enome 

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