German automakers are having another day to forget. Shares of one of their “flagships” Mercedes-Benz are suffering on Friday after the company cut its financial forecasts due to the rapid deterioration of its business in China, representing yet another “nail” for the sector and the latest blow to the weakened German manufacturing sector.
The stock market hemorrhage after this news was not long in coming: shortly after the opening of the German stock exchange, Mercedes-Benz shares fell by more than 8% to 54.23 euros, the decline has since eased somewhat. The contagion to its peers was not long in coming: Volkswagen wiped out 2.5%, BMW 3.5% and Porsche more than 2%.
Adjusted profits at the group’s main auto unit are now expected to be in a range of 7.5% to 8.5%, compared with a previous forecast of up to 11%, Mercedes-Benz said late Thursday. China, the company’s biggest market, lost further momentum as wealthy buyers postponed purchases of Mercedes’ most expensive models, such as the S-Class and Maybach sedans.
Delving into its problems, Mercedes-Benz points out that the reduction in these forecasts “is caused by a further deterioration of the macroeconomic environment, mainly in China”, citing “weaker consumption, as well as the continued slowdown in the real estate sector”.
Earnings before interest and taxes are now expected to be “significantly below” the previous year’s level, Mercedes reported, a serious setback for the company which is pursuing a luxury strategy with more sales of its most exclusive vehicles to boost profitability.
This profit warning It is the latest setback for Germany’s largest industry, which is facing a difficult transition to electric cars and dwindling profits from China. Volkswagen, the continent’s largest automaker, this month broke a decades-old labor pact and is set to close domestic plants in Germany for the first time because of falling demand. BMW last week cut its full-year profit forecast, citing the recession in China and weak electric vehicle sales.
RBC auto analyst Tom Narayan acknowledges that the magnitude of the profit warning It came as a surprise. For Mercedes, the drop in sales of its premium cars is also a blow to its strategy to finance its transition to an all-electric future and shore up its profits. The strategy of targeting wealthier consumers was meant to protect sales from a decline.
To make matters worse, the company’s latest electric vehicles have received a mixed response from Chinese and other consumers. Younger Chinese customers are increasingly turning to domestic brands, which are seen as more advanced in digital technology and entertainment than premium German brands such as Mercedes.
As business in China declines, sales in Europe are also under pressure. Mercedes deliveries to the region fell 13% in August and 3% in the first eight months. The collapse in electric vehicle sales is undermining automakers’ strategies to comply with tough CO2 emissions rules that come into force in the European Union next year and exposing the industry to billions of euros in fines. Economy Minister Robert Habeck is hosting an industry summit in Berlin on Monday to discuss how to emerge from the current crisis.
