The stubborn lull in the Chinese market for luxury cars is leaving the Stuttgart-based car manufacturer Mercedes Benz look more pessimistically into the future. On Thursday, the company lowered its forecast for the full year for the second time in two months and now expects a significantly lower profit than a year ago.
Mercedes shares fell 8.4 percent to a two-year low on Friday, but then recovered. Although some investors had expected a profit warning, it came as a surprise and was larger than expected, analysts said.
Operating profit significantly below previous year
The Stuttgart-based company is only expecting an adjusted return on sales of between 7.5 and 8.5 percent for the year as a whole in the passenger car division; previously they had assumed 10 to 11 percent. That implies an adjusted return on sales of around 6 percent in the second half of the year, it said. The margin targets in the other divisions remained unchanged. Nevertheless, the group assumes that the operating profit of the entire group will be significantly below the level of the previous year – Mercedes-Benz had previously only expected a slight decline. In 2023, the car manufacturer recorded profits before interest and taxes of 19.7 billion euros.
Free cash flow is also expected to be well below the previous year’s level of 11.4 billion euros. In addition, the group points to negative valuation effects, which are expected to lead to a percentage point lower return in the passenger car division in the second half of the year.
The trigger was a further deterioration in the macroeconomic environment, especially in China, was the justification. The Chinese economy continued to lose momentum due to weaker consumption and the ongoing downturn in the real estate sector. “This impacted overall sales in China, including sales in the top-end segment.”
Mercedes had already noticed in the first half of the year that fewer top models were being sold, which usually have a significantly higher profit margin than smaller vehicles. At the end of July, Mercedes boss Källenius had pinned his hopes on new models that would come onto the market in the second half of the year and boost business. But this hope now does not seem to be fulfilled. Mercedes announced that the sales mix in the second half of the year would remain unchanged compared to the first half of the year and would therefore be weaker than originally expected. Price pressure is also likely to remain: Mercedes itself spoke of a “dynamic price environment”.