### Mercedes-Benz to Intensify Cost-Cutting Amid Declining Earnings and Competitive Pressures

Mercedes-Benz has announced plans to enhance cost-cutting measures following a significant dip in earnings for the third quarter. The company attributes this downturn to weak demand and intense competition in the Chinese market. During the period, Mercedes halved its earnings, prompting it to revise its full-year profit margin forecast twice, joining other European automakers who have pointed to faltering Chinese demand as a primary cause for reduced profits.

Union Investment, one of Mercedes' top 30 investors according to LSEG, urges a strategic shift in response to changing market dynamics and increased Chinese competition. "We support adjusting the strategy to align with new market conditions and competition from China," commented Moritz Kronenberger, a portfolio manager at Union Investment. Kronenberger emphasized that Mercedes' current "value over volume" strategy could be effective if demand and supply were balanced—an equilibrium the automaker presently lacks.

Mercedes-Benz's refusal to engage in China's price war further complicates its position. The company remains committed to its "value over volume" approach and hopes that a significant new model lineup will boost sales next year. However, Kronenberger points out that Chinese consumers are currently more interested in affordable electric vehicles, a segment where Mercedes' offerings are lacking.

The luxury carmaker's shares fell by 1.6%, negatively affecting other German carmakers like BMW and Volkswagen. Year-to-date, Mercedes' stock has dropped approximately 8%, underperforming Germany's DAX index, though it still fares better than Volkswagen, BMW, and Porsche AG. The pan-European autos index also mirrors this decline, down 10% this year and marking it as Europe's worst-performing sector.

The company's car division reported a dramatic fall in its adjusted return on sales, dropping to 4.7% from 12.4% compared to last year—its least profitable period since the pandemic. Earnings in this division more than halved, missing analysts' expectations. CFO Harald Wilhelm remarked that the third-quarter results fell short of the company's ambitions and highlighted the necessity for intensified cost-cutting measures.

Despite already making significant progress in reducing fixed costs by 15-16% since 2019, Wilhelm cautioned that further reductions will be more challenging. Stifel analyst Daniel Schwarz noted that while Mercedes had achieved substantial fixed-cost reductions, there are fewer "low-hanging fruits" left, especially when compared to Volkswagen.

The downturn in Chinese consumer demand has heavily affected Mercedes, particularly in its high-end S-Class model sales. The costs associated with launching new versions of models like the G-Class SUV further contributed to the financial strain in the third quarter. Mercedes anticipates car sales in 2024 will be slightly lower than the previous year, with fourth-quarter sales holding steady at third-quarter levels.

Addressing speculation over a potential sale of Mercedes' 35% stake in Daimler Truck, Wilhelm stated there is no rush, believing in significant future potential for the truckmaker. This optimism lifted Daimler Truck shares by 4%, topping Germany's DAX index.

CEO Ola Kaellenius has cautioned that Chinese consumers remain wary of making substantial purchases amid ongoing economic uncertainty and a real estate crisis. According to Stifel's Schwarz, declining Chinese preference for German luxury cars exacerbates the situation. The tension between Brussels and Beijing over tariffs on Chinese EV imports into Europe adds to the challenges, with Mercedes labeling the proposed tariffs a "mistake" and calling for a delay to facilitate more negotiations.