In the realm of high-end automotive brands, there has been an escalating consensus that luxury vehicles are becoming increasingly difficult to sellDespite this generally pessimistic outlook, recent results from Mercedes-Benz have taken many industry experts by surprise, demonstrating unexpected twists in their financial report for the third quarterThe company's revenue figures dropped sharply, hitting €34.528 billion and marking the lowest quarterly revenue recorded in nearly three yearsThis was coupled with a staggering net profit decline of more than 50% year-over-year, indicative of the broader challenges facing luxury car manufacturers.

Long before the quarterly earnings report was made public, Mercedes-Benz had proactively adjusted its profit targets twice within a single quarter, delivering warnings of diminishing profitability

Such moves were clearly meant to prepare stakeholders for the disappointing performance aheadThe financial landscape for the brand in the first three quarters of the year showed a revenue of €107.144 billion, representing a 5% drop compared to the same timeframe last yearAdditionally, earnings before income and taxes (EBIT) decreased significantly, falling to €10.417 billion from €15.334 billion, which translates to a 32% reduction in profitability.

Focusing on the third quarter specifically, Mercedes reported a revenue drop of 7%, along with an EBIT decrease of 48% and a net profit plunge of 54%. The automotive division, which is considered the core of the Mercedes brand, faced a 5.6% revenue decline to €25.602 billion, while its EBIT was slashed by 64% to just €1.198 billion—a stark contrast to the €3.312 billion from the previous year, resulting in a distressing adjustment in return on sales to only 4.7%. The financial report stated that these declines were primarily influenced by shifts in product strategy, rising sales costs, and increased competition particularly within the Chinese market.

From a sales standpoint, the number of vehicles sold in the first three quarters reached 1.4633 million, reflecting a 4% decrease from last year

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Surprisingly, the third quarter saw a small decline in car sales, decreasing by only 1% to 503,600 units compared to the same quarter last yearWhile total sales numbers remained relatively stable, the performances of the distinct product lines exhibited marked disparitiesThe luxurious models, such as the S-Class and Maybach limousines, which were previously referred to as the brand's significant profit centers, have experienced notable downturns in sales performance.

For instance, during the third quarter, sales of high-end models fell by 12% to 61,800 units, while core models saw a 4% increase to 301,000 unitsConversely, entry-level models also showed a downturn, reducing by 7% to 140,700 unitsA crucial point to note is that the stable overall sales figures despite declining revenue and profits may indicate that Mercedes-Benz resorted to a strategy of lowering prices to boost sales volumes

The financial report further revealed that the subsidies extended to Chinese dealers were also a contributing factor to the decreased net profit.

In assessing the reasons behind the substantial net profit decline in the third quarter, the predominant factors emerged as falling sales of luxurious models alongside a decrease in unit pricesFurthermore, Mercedes-Benz has been sluggish in its electric vehicle (EV) strategyThe company outlined its electrification roadmap back in 2016, and two years ago, CEO Ola Källenius expressed ambitions to have electric vehicle sales represent over 50% of their total by 2025. However, this target has now been adjusted to 2030, raising significant concerns about the brand's long-term competitiveness in the EV market.

Over the first three quarters, the sales of electric vehicles stood at 267,400 units, marking an 8% decrease and constituting merely 18.27% of total sales

Within this, pure electric model sales saw an alarming drop of 22%. Maintaining the current sales trajectory, achieving the 2025 goal for electric vehicles seems almost insurmountable.

Regionally, the first three quarters displayed variances in performanceMercedes-Benz recorded significant growth within North America, with total sales hitting 264,600 units, which is an impressive 6.4% increaseNotably, U.Ssales burgeoned by 9%, reaching 236,300 units especially with a remarkable 32.8% gain in the third quarter, with 85,000 units soldIn stark contrast, the performance in European and Asian markets has been significantly weaker.

In Europe, total sales amounted to 476,000 units, marking a 1.9% decline; the third quarter alone saw a 3.6% drop to 158,300 unitsAsia, particularly the Chinese market—the single largest market for Mercedes—showed pronounced downturns

In China, total revenue was recorded at €17.227 billion for the first three quarters, down 6.7% year-over-yearThird-quarter figures were even grimmer, with an income drop of 16.6% to €5.09 billion.

From a sales perspective, a drastic decline of 10.2% was seen in total automotive sales in China compared to last year, with the third quarter alone witnessing a 12.9% fall, leading to it being the market with the largest decline in sales figures for that quarterThe luxury car market in China continues to struggle under the pressures of consumer spending reluctance amidst ongoing "price wars." In a recent conference call, Chief Financial Officer Harald Wilhelm highlighted the fierce competition, describing the Chinese market as the most uncertain territory for the company, with a cautious target of merely maintaining third-quarter sales levels during the fourth quarter.

Market data paint a stark picture of sales dynamics, revealing a substantial drop in the sales of high-end models while entry-level models are struggling for competitive viability due to price strategies

Moreover, fluctuations from refreshes and pricing adjustments have also contributed to subdued sales across core model linesNotably during the third quarter, the best-performing models in China remained the GLC, C-Class, and E-Class, which accounted for over 70% of total salesRetail reports indicated that both GLC and C-Class sales exceeded 42,000 units, while E-Class sales were slightly down at 36,000 units.

The decline in sales of the E-Class has been speculated to be linked to its recent redesigns that occurred in June and August of this yearFollowing the second redesign, several models experienced price increases ranging from €1,800 to €4,600, with adjusted prices climbing to ranges of €45,180 to €52,980. Impacted by these fluctuations, E-Class sales in August fell below the 10,000-unit threshold.

In July, it was announced that Mercedes-Benz would step back from the "price war" narrative, following direct competitors like BMW and Audi

Prior to this strategy change, total deliveries throughout the first half of the year totaled over 352,600 vehicles, down 5.8% year-on-yearEvidently, this previously adopted “price war” tactic not only failed to boost sales figures but impacted the long-term net profit outlook and damaged the prestigious brand image that Mercedes has cultivated over decades.

Faced with the ongoing struggles within the Chinese market, Mercedes subsequently lowered its full-year profit margin expectations twice in a span of three monthsIn September, the projected profit margin for the automotive sector was revised down to a range of 7.5% to 8.5%, warning that operating profit and free cash flow for the entire group would be significantly weaker than in 2023. This follows an earlier adjustment in July, which was attributed to shifting market conditions in China.

During an analyst call that tagged the initial alert, Källenius expressed uncertainty about how long the cooling effect in China would persist while committing to efforts that would "maximize" performance through the introduction of new products tailored for this market