Stuttgart, Germany

Mercedes-Benz has revised its annual profit margin forecast downward after reporting weak second-quarter sales and earnings. The German automaker now expects an adjusted return on sales between 10-11% for 2024, down from the previous target of 10-12%. This adjustment reflects the company's struggle with declining demand for electric vehicles (EVs), fierce competition in China, supply chain issues, and persistently high interest rates.

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Hybrid Sales as a Silver Lining

Despite the challenging landscape for EVs, Mercedes anticipates an uptick in plug-in hybrid sales in the latter half of 2024. The company believes that as the European and U.S. markets show stronger demand for hybrid models, this segment could help offset the lagging EV sales. "We see a stronger demand for hybrid models in the second half of the year," a Mercedes spokesperson noted.

Market Reactions and Analyst Perspectives

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Following the announcement of the revised forecast, Mercedes-Benz shares dipped 1.4% in early trading. Analysts had mixed reactions to the news. While some investors expected a more severe profit warning, the slight trimming of the margin forecast was seen as a relief. "Mercedes merely trimming its margin forecast will likely be met with relief," wrote Bernstein analysts in a client note.

Performance Metrics and Economic Outlook

In the second quarter, Mercedes' cars division achieved a 10.2% return on sales, though adjusted earnings fell short of analyst expectations. The company reported a 6% drop in sales for the first half of the year, with EV sales plummeting by 17%. Citi analysts remarked, "Overall, Mercedes execution has recovered, but overall sales, and top-end sales mix have remained weak."

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Mercedes-Benz acknowledged the uncertain economic outlook but highlighted some positive trends. The company observed improving market sentiment in Europe and solid momentum in the U.S. market. However, it remains cautious about the Chinese market, where it faces intense competition in the entry-level and core model segments. Mercedes aims to defend its leading position in the top-end car models segment in China.

Flexible Approach to Market Demands

CEO Ola Kaellenius emphasised the company's flexible approach to meet consumer demand for both fossil-fuel and electric models. In a conference call with investors, he stated, "We will continue to offer consumers both fossil-fuel and electric models based on demand." Kaellenius acknowledged the necessity of competing in the EV market in China due to the rapid adoption of electric models there. "That's a race you've got to be in," he said.

Financial Performance and Adjustments

Mercedes-Benz reported a 27.5% drop in adjusted earnings in its car division for the second quarter, compared to LSEG's estimate of a 26% decline. At the group level, earnings before interest and taxes (EBIT) fell by 19.1%, aligning with LSEG's consensus. The lower profit outlook and disappointing quarterly performance underscore the challenges Mercedes-Benz faces in the current market environment.

Mercedes-Benz's decision to lower its profit margin forecast reflects the complex and competitive landscape it operates in. While the company anticipates a boost in hybrid sales, the overall decline in EV demand and strong competition in China present significant hurdles. The automaker's flexible approach to offering both fossil-fuel and electric models highlights its strategy to navigate these challenges. However, the road ahead remains uncertain, with market dynamics and consumer preferences continuing to evolve.

(Inputs from Reuters)