German car manufacturers are weakening – this also applies to Mercedes-Benz. One market in particular is causing problems for the manufacturer.
Car maker Mercedes-Benz suffered a slump in profits in the third quarter due to weakness in the important Chinese market. The results slipped by around half, and the passenger car business in particular was disappointing due to the tough competition in the People’s Republic and the generally weak economic situation.
“The financial results of the third quarter do not meet the expectations that we at Mercedes-Benz have for ourselves,” said CFO Harald Wilhelm, according to the statement. He now wants to pay even more attention to costs and efficiency. Management had already significantly reduced profit expectations for 2024 in September. The shares fell. Since the annual high of over 77 euros in April, the price loss has been around a quarter.
Wealthy Mercedes customers became thrifty
Analysts had already expected a significantly worse quarter after the warnings. They had not foreseen that Mercedes only achieved an operating profit margin of 4.7 percent in its core passenger car business before interest, taxes and special effects. A year earlier it was 12.4 percent.
Mercedes is having difficulties, especially in China, because the expensive models with the star are not doing as well there as expected and there are no signs of any improvement for the current year. The expensive cars are the core element of CEO Ola Källenius’ strategy and have driven the Swabians’ return on sales to record highs in recent years. However, with the economic downturn in the People’s Republic, particularly in the real estate market, wealthy Mercedes customers have become unexpectedly thrifty.
Competition in China is growing
In addition, competition from domestic car manufacturers is growing in the country, which has been the guarantee of growth for German manufacturers for many years. In the electric sector, which is growing rapidly in China, Mercedes is still waiting for resounding success with its models such as the EQS, the fully electric counterpart to the S-Class. In the third quarter, Mercedes spent a total of a mid-three-digit million euro amount to, among other things, reduce the inventory of electric cars in car dealers’ yards through discounts and to support sales in China with subsidies, as CFO Wilhelm said.
September’s forecast cut was the second time this year that management had to curb earnings expectations. Before the weekend, Mercedes consequently lowered the sales expectations for the entire group and the sales expectations for the passenger car division – both are now expected to be slightly below the previous year’s level.
Mercedes sold 503,573 cars in the third quarter, 1.4 percent less than a year earlier. However, the car manufacturer was no longer able to achieve such high prices and sold a smaller proportion of more expensive cars, so that profits plummeted.
An important key figure for investors is in better shape
Mercedes performed better than generally thought in terms of free cash flow in the industrial business – i.e. excluding financial services. The key figure is important for investors because Mercedes wants to use the available funds to buy back shares in addition to the regular dividend. These are popular with many professional investors because they mathematically increase the profit share per share and can therefore support the price.
Wilhelm spoke of a “solid cash flow”. At 2.39 billion, this was slightly higher than the value of a year ago, particularly thanks to lower inventories, which tie up capital.
Source: Stern
