Mercedes-Benz, the German luxury automaker, has seen a significant drop in its share price following a profit warning issued on September 20, 2024. The company cited weakening demand in China as the primary reason for the downgrade, which has had ripple effects across the European automotive sector, reports CNBC.

Profit Warning Details

Mercedes-Benz announced a substantial revision to its 2024 financial guidance. The company now expects an adjusted return on sales to be between 7.5% and 8.5%, down from the previous forecast of 10% to 11%.

Additionally, full-year EBIT (Earnings Before Interest and Taxes) is expected to be “significantly below” last year’s level of €19.7 billion, compared to the earlier guidance of “slightly below.”

This marks the second time Mercedes has cut its guidance in less than two months, following weak earnings in the second quarter of 2024.

Market Reaction

The market response to this news was swift and negative. Mercedes-Benz shares fell by more than 8% initially, later stabilizing at around 6.5% down.

The stock touched a 52-week low of €54.05 early in the trading day. As of September 20, 2024, Mercedes shares have lost about 12% of their value year-to-date.

Reasons for the Downgrade

The primary factor behind the profit warning is the deteriorating macroeconomic environment in China, Mercedes-Benz’s key market.

Specifically, China’s economic growth has lost momentum, there’s weaker consumption in the Chinese market, and the ongoing downturn in China’s real estate sector is affecting consumer spending.

These factors have led to lower sales volumes, including in Mercedes’ lucrative top-end luxury segment.

Impact on the Automotive Sector

The profit warning from Mercedes-Benz has had a broader impact on the European automotive sector. The Stoxx Europe 600 Automobiles & Parts index was the weakest performing sector following the news.

Other German automakers also saw their shares decline, with Porsche AG down 5.4%, BMW falling 3.2%, and Volkswagen dropping 2.9%. Suppliers like Continental and Infineon also experienced weakness in their stock prices.

Analyst Perspectives

Several analysts have weighed in on this development. UBS analyst Patrick Hummel noted that Mercedes’ cut was more severe than BMW’s recent guidance reduction.

RBC expert Tom Narayan expressed surprise at the lack of cautionary statements from Mercedes leading up to the profit warning. Warburg analyst Marc-René Tonn suggested that the revised forecast raises questions about Mercedes’ medium-term targets.

Broader Implications

This profit warning highlights ongoing challenges in the automotive industry. German automakers are struggling with weak demand and the transition from combustion engines to electric vehicles.

The Chinese market, crucial for luxury car brands, is becoming increasingly competitive and challenging. There are growing concerns about the profitability of German automakers in China.

Industry expert Ferdinand Dudenhoffer from the Center Automotive Research (CAR) has warned that China is becoming the “biggest stress test of the last 50 years” for German car manufacturers, emphasizing the need for increased investment and development of electric vehicles in the Chinese market.

EVXL’s Take

The recent profit warning from Mercedes-Benz underscores the critical role that the Chinese market plays in the success of luxury automakers. As the transition to electric vehicles (EVs) continues, companies like Mercedes-Benz must accelerate their EV strategies to remain competitive.

This shift is not just about meeting regulatory requirements but also about capturing the growing demand for sustainable transportation.

For more insights on how Mercedes-Benz and other automakers are navigating the EV landscape, check out our recent articles on Mercedes-Benz and BMW. The future of the automotive industry is electric, and those who adapt quickly will be the ones to thrive.

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