Mercedes, BMW flash warning lights in China

Mercedes-Benz late Thursday became the second luxury carmaker in as many weeks to cut its profit forecast for the year. Like its Bavarian rival BMW, which warned about profits last week, the Stuttgart-based company blamed the downshift on wealthy consumers in China who have become more cautious, among other factors.

“We wanted to do more, but when in your largest market your core customer base is on the fence in every respect, it certainly becomes more difficult,” Chief Executive Ola Källenius said on a call with analysts on Friday. The carmaker’s shares fell 6% in morning European trading.

The warnings from southern Germany reflect a more cautious tone in France’s luxury industry in recent months, with handbag makers such as LVMH and Kering spooking investors with falling sales in key market China.

The problems at Mercedes and BMW also signal deepening troubles for the global auto industry, which is grappling with the effects of high interest rates and the costly shift to electric vehicles. China’s luxury car market has been a relative bright spot until recently, with consumers still favoring traditional engines and lucrative top-of-the-line models like the Mercedes-Benz S-Class.

This year, the mood has changed: In the eight months to August, customers in China bought 10 percent fewer Mercedes cars and 11 percent fewer BMWs, according to car insurance data compiled by brokerage Bernstein.

While the government’s car-replacement policy has boosted car sales in China in recent months, it has not affected larger-engined vehicles, which are often made by German companies. That has left them at the mercy of local consumer sentiment for some of their most profitable models amid falling property prices.

German luxury brands are not being drawn into the price war that continues to grip the mainstream Chinese car market, even if it means losing sales.

Porsche sales fell by a third in the first half of the year as the company stubbornly stuck to its “value over volume” strategy at home. The sports car brand, majority-owned by Volkswagen, changed its boss in China this month.

The VW brand itself, long a market leader in China, has struggled for several years as consumers buy more electric vehicles, especially from budget champion BYD. As of July, more than half of new passenger car sales in China have been plug-in models.

Falling revenues from VW’s Chinese joint ventures and once-lucrative licensing deals are forcing the company to consider closing factories in Germany, sparking a high-profile conflict with the company’s powerful union.

While both Mercedes and BMW have cited macroeconomic pressures rather than competitive pressures, the emergence of local players offering innovative electric vehicles aimed at more affluent consumers is another cause for concern for investors.

Analysts say companies like Li Auto, XPeng and NIO could start to appeal to more affluent, tech-savvy Chinese consumers, luring them away from German brands, even as these startups struggle to maintain steady sales and strong financial results in the tough, fast-growing electric vehicle market.

“There is no reason why what is happening in the mass market will not happen in the premium segment over time,” said Jefferies analyst Philippe Houchois.

BYD, which took over the market leadership from VW, also has plans for more affluent consumers, although it has made little headway so far. It launched the Denza brand with Mercedes in 2011, but sales were limited. Mercedes sold the remaining 10 percent stake back to its Chinese partner earlier this week.

Like French fashion houses, German carmakers are heavily dependent on the Chinese market, which last year accounted for 36% of Mercedes’ unit sales, 32% for BMW and 25% for Porsche. Historically, sales there have carried higher margins than elsewhere, as consumers have tended to favor more expensive models.

After the forecast cuts, Mercedes and BMW expect their headline profit target for this year to be “significantly” lower than last year’s level — language that suggests a drop of more than 10%, in line with the companies’ guidance. They previously said it would be “slightly” lower, meaning a drop of less than 5%.

The scale of the changes surprised analysts and investors. BMW shares fell 11% on the day of the warning last week, the most since the panic over the Covid-19 pandemic in March 2020.

Both companies also cited non-China-related reasons for the sharp decline in their prospects. At BMW, a faulty brake module made by industrial supplier Continental could cost nearly 1 billion euros, or $1.1 billion, to repair. Replacing the units, which are buried deep inside the car, is labor-intensive.

Meanwhile, Mercedes is making “pricing adjustments,” partly to help shift slow-selling electric vehicles. They are expected to account for 1% of revenue in the second half of the year, which would be about €850 million based on current estimates.

Write to Stephen Wilmot at [email protected]