Mercedes-Benz cuts margin outlook on weak Chinese market

Mercedes-Benz cut its full-year profit margin target for the second time in less than two months, hitting European auto stocks as it joined a growing number of rivals that are blaming a weakening Chinese car market, the world’s largest.

Shares in the German luxury carmaker fell to their lowest level in nearly two years after the profit warning, which was released on Thursday, and were the top decliners among European auto stocks. Shares were down 7.2% at 8.25am GMT on Friday.

Economic weakness in China as well as a local property crisis has severely hit demand, including for cars, which has become a headache not just for Mercedes but also Volkswagen, Porsche and BMW.

As a result, Mercedes-Benz cut its earnings outlook for 2024 for both Mercedes-Benz Cars and the Mercedes-Benz Group, after already downgrading its margin outlook in July on the same grounds.

“There is a tremendous amount of cautiousness, I’m trying to say this diplomatically,” Mercedes CEO Ola Kaellenius told analysts in a call following the announcement, adding it was not surprising that spending for expensive capital goods was pared back in such an environment.

“How long will that go on? I don’t know, but I remain cautious for the foreseeable future on China.”

Mercedes-Benz Cars now expects an adjusted return on sales to be between 7.5% and 8.5% in 2024, down from 10% to 11% previously, implying an expected adjusted return on sales of about 6% for the second half of the year.

As a result, Mercedes-Benz Group’s earnings before interest and taxes (ebit) are now expected to be significantly below last year’s level of €19.7bn compared with a forecast for a slight drop previously.

According to LSEG estimates, the group’s is expected to report ebit of €15.83bn.

“Needless to say that we’re not satisfied with the situation and we’ll review a comprehensive set of measures, how we step up the contribution margin quality,” finance chief Harald Wilhelm said, adding the group would seek further efficiencies.

Free cash flow for the group’s industrial business is also expected to be significantly less than the previous year's level.

Analysts at RBC said that while investors had expected a profit warning, the warning was still seen as a surprise, “especially given the magnitude and lack of cautionary commentary ahead of today’s news”.

Last week BMW also flagged muted demand in China affecting sales in the country, adding to the group of carmakers facing difficulties in the world’s second-biggest economy.

Reuters