(News Bulletin 247) – Penalized by China, the German premium group was forced to slash its profitability forecast for 2024. This announcement plunges the entire European automotive sector into the red.

This September has seen a series of astonishing bad news for the German automobile industry.

This Friday, Mercedes-Benz extended the list, issuing a heavy profit warning. The German premium group now expects to generate an operating margin of 7.5% to 8.5% in 2024, compared to a previous range of 10% and 11%. This implies a margin of only 6% in the second half. The operating result, in value, will be significantly lower than its 2023 level, the German group also warned.

Furthermore, cash flow generation from industrial activities is now expected to be “significantly lower” than in 2023, whereas Mercedes had previously expected to increase it “slightly”.

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Blame it on China

Mercedes-Benz has very clearly attributed this warning to the poor Chinese economy, with China representing 17% of its revenues in 2023.

“This situation was caused by a further deterioration in the macroeconomic environment, mainly in China. GDP growth in China lost momentum due to weaker consumption and the continued slowdown in the real estate sector,” the manufacturer explained.

“This situation has affected the overall sales volume in China, including sales in the premium segment. Overall, the sales mix in the second half of 2024 is expected to remain unchanged compared to the first half, and therefore weaker than initially expected,” the former Daimler Group said.

The company also estimated, more broadly, that competitive intensity on prices would continue in the second half of the year.

“The downgrade is not a big surprise to us. However, we believe it is an additional negative element due to the magnitude of the warning and the fact that the sentiment (of the market, editor’s note) towards Mercedes had been more positive,” comments Stifel.

“While some investors anticipated a warning from Mercedes, we continue to view this news as a surprise, particularly given the magnitude and lack of cautionary commentary prior to today’s announcement,” Royal Bank of Canada said.

A sector close to capitulation

On the Frankfurt Stock Exchange, Mercedes-Benz plunged, falling by 7.4% in the middle of the morning. The premium group dragged BMW (-3.3%) and Volkswagen (-2.5%) in its wake. In Paris, Stellantis and Renault, which have only a limited presence in China for the former and none for the latter, dropped by 2.6% and 2.1% respectively.

This new negative announcement may prompt investors to sell the entire European automotive sector.

Last week, BMW had already issued a profit warning, a few days before Mercedes. The Bavarian group cited problems with a brake system supplied by Continental and mentioned weak Chinese and American markets. Renault, which is absent from these last two markets, was punished by the market following BMW’s warning.

“This announcement adds to a long list of bad news for the sector and could push some investors to completely exit the car market while waiting for the bearish cycle to end,” Adrien Brasey, an analyst at the independent research firm AlphaValue, explained to News Bulletin 247.

German groups are particularly struggling in China. Michael Foundoukidis, an analyst at Oddo BHF, explains that this market is “in full transformation”. “This mainly affects German manufacturers who made a significant part of their results there, now losing a lot of market share in the growing electrification segment while undergoing a real price war”, the expert explains.

The German automobile industry is experiencing a black September. In addition to profit warnings from BMW and Mercedes-Benz, Volkswagen revealed earlier this month that it was considering an unprecedented austerity drive, with potential layoffs and plant closures.