Will Mercedes’ cost-cutting gamble pay off?

What happened Mercedes-Benz’s third-quarter results highlight a troubling trend for the German automaker, particularly in the critical Chinese market. Earnings halved during the July-September period, and the company’s adjusted return on sales for its core car division plummeted to 4.7%, the lowest since the pandemic. In response, Mercedes announced plans to ramp up cost-cutting measures while holding firm to its “value over volume” strategy, resisting the price war in China. Mercedes’ challenges reflect broader difficulties faced by legacy European automakers in the Chinese market. Domestic competition from brands like BYD and Geely has surged, with consumers increasingly opting for affordable, locally-produced electric vehicles (EVs). The German marque has cut its full-year profit margin guidance twice and continues to bet on a new lineup of luxury models slated for 2025. The stakes are high as the luxury carmaker aims to revitalize its premium image amid a faltering Chinese economy and shifting consumer preferences. The Jing Take The pressure on traditional luxury automakers, particularly in China, has never been greater. Mercedes’ decision to avoid steep discounts and focus on brand value is a calculated risk, given today’s economic climate. As Chinese consumers shy away from big-ticket luxury purchases and the local EV market expands, legacy European brands like Mercedes, BMW, and Porsche face a significant dilemma. Their historical dominance, built on brand prestige and premium quality, is being undercut by domestic players who offer feature-rich EVs at a fraction of the cost. The strategy of shunning the price war – upheld by Mercedes and other German manufacturers – aims to protect brand equity. However, this approach has its drawbacks. In a market increasingly defined by budget-friendly and technology-forward options, relying on premium models to drive future growth may not resonate with a younger, cost-conscious demographic. While Mercedes has outlined plans for new luxury SUVs, including revamped versions of its G-Class, the success of these models will largely depend on Chinese consumers’ sustained interest in high-end vehicles amid economic uncertainties. The competition from Chinese EV makers is about more than just about price. Brands like BYD and Geely have capitalized on the shift to EVs, attracting consumers through a combination of affordability, cutting-edge technology, and strong governmental backing. In contrast, European automakers are grappling with supply chain challenges, increased production costs, and a need to pivot to electric mobility – while remaining profitable. Meanwhile, geopolitical tensions loom large. Mercedes, along with other European brands, could face further complications from the brewing EU-China trade disputes, particularly around tariffs on Chinese EV imports. Any retaliatory measures by Beijing could strain foreign automakers’ already tenuous foothold in China’s lucrative auto market. The Jing Take reports on a piece of the leading news and presents our editorial team’s analysis of the key implications for the luxury industry. In the recurring column, we analyze everything from product drops and mergers to heated debate sprouting on Chinese social media.

Will Mercedes’ cost-cutting gamble pay off?

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Published October 28, 2024

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Will Mercedes’ cost-cutting gamble pay off?