Mercedes: China Market Deterioration Exceeded Expectations, Car Margin Falls to 2%–3%

Key Facts

Mercedes-Benz Chief Executive Ola Källenius said the Chinese market had deteriorated this year by more than the company expected at the start of the year, with weakness deepening in the second half and spreading to the premium segment dominated by Mercedes. The warning came on the third-quarter results call, as the company reported an 8% year-on-year decline in car sales to 407,232 vehicles. Mercedes attributed the decline mainly to difficult market conditions and intense competition in China. Källenius said the deterioration was “greater than we thought would happen this year, and certainly greater than we expected at the beginning of the year.” His remarks reflect mounting pressure in a market where the company had expected its luxury brand to prove more resilient to competition.

The impact of the Chinese market was not limited to sales volumes: Mercedes said tougher conditions and rising competition weighed on group results. Adjusted earnings before interest and taxes fell 15% to 1.78 billion euros in the third quarter, compared with 2.10 billion euros in the same period a year earlier. The company said more challenging market conditions in China, along with foreign-exchange effects, pressured results. Källenius said cost discipline and contributions from the vans and financial services divisions helped offset these headwinds. He also said market conditions had become more difficult over the course of the year, particularly in China.

Mercedes cut its forecast for the adjusted return on sales at its car division to 2%–3% for fiscal 2026, from a previous range of 3%–5%. The company said the update mainly reflected a difficult market environment in China and higher fourth-quarter costs. Higher costs include raw materials and measures related to the product cycle, according to the forecast update. At group level, Mercedes now expects earnings before interest and taxes to be at the prior-year level, after previously forecasting a significantly higher level. The guidance cut means the company expects pressure from China and costs to continue affecting its performance through the rest of the year.

Data from the Chinese market show a divergence between weak domestic sales and expanding exports. Domestic passenger-car sales fell 27.4% year on year in October, while exports reached about 927,000 vehicles, up 62.3%. In the first ten months of 2026, domestic sales totaled 14.5 million vehicles, compared with 19.4 million in the same period of 2025. Over the same period, passenger-car exports exceeded 8 million vehicles, versus 4.8 million a year earlier. The Associated Press reported that cuts to some government subsidies for buyers and economic uncertainty weakened demand, amid a price war, fierce competition and excess supply.

Mercedes had described the Chinese market in the first quarter as well below its level a year earlier and said the luxury and premium car market remained tense. The company then attributed its weaker sales in China to planned model changes, economic uncertainty and persistently difficult competition. In the third quarter, Mercedes sales outside China grew for the third consecutive quarter, rising 5% in Europe, 13% in Germany and 6% in the United States. Fully electric car sales also reached a quarterly record, rising 61%, and accounted for 16.8% of global sales. These increases provided support for the company but did not prevent a decline in total car sales or lower adjusted group earnings.

For the Chinese market as a whole, the Associated Press quoted a source at the China Passenger Car Association as expecting domestic retail car sales to reach about 18.5 million vehicles in 2026, the lowest level in years. By contrast, Chinese car exports could exceed 10 million vehicles this year, according to the same source and other analysts cited by the agency. Exports face potential challenges from protectionist measures and expected changes to export tax rebates. Mercedes shares traded in the United States closed at 11.56 dollars on November 10, compared with 11.76 dollars in the previous session. The company plans to provide a broader strategic update next year, including a detailed review of its China business, Reuters reported.

Källenius said China would remain an indispensable market and an innovation hub for Mercedes, despite the company’s effort to reduce its reliance on profits generated there. In this context, Mercedes aims to localize the supply chain for cars made in China to a level close to complete, according to the chief financial officer. The move is intended to cut costs and improve competitiveness in the domestic market. The company is also reassessing its operating model in China after weakness across the broader market and the luxury car segment exceeded its expectations. Mercedes will present details of its review of its China business as part of the broader strategic update scheduled for next year.