Quick answer
What’s happening? Mercedes-Benz posted a 57% collapse in operating profit for 2025, with EBIT plunging from €13.6 billion to €5.8 billion — well below forecasts. Revenue slipped 9% to €132.2 billion, while China sales fell 27% as BYD and Xiaomi outpaced the German brand on both price and technology. The company is now cutting up to 30,000 jobs and chasing €5 billion in savings by 2027. Its 2026 margin outlook — just 3–5% — suggests the pressure isn’t easing.
For a company that only recently enjoyed record post-pandemic pricing power, 2025 marked a sharp reversal.
Mercedes-Benz reported one of the steepest profit declines in its modern history, with operating earnings falling 57% to €5.8 billion — missing analyst expectations and marking its weakest performance in more than a decade. Revenue also undershot forecasts, dropping 9% to €132.2 billion.
Even more concerning: the core passenger car division scraped together an adjusted 5% return on sales — a figure that would have been unthinkable just two years ago, when management confidently targeted double-digit margins.
The issue isn’t simply a slow year. It’s structural.
China: From profit engine to problem market
The company’s most profitable geography has become its biggest vulnerability.
Sales in China plunged 27% year-on-year in the third quarter, the worst regional performance globally. For the full year, China accounted for just 15.9% of group revenue — a steadily shrinking share.
The competitive landscape has changed fast and permanently.
BYD, now the world’s largest electric vehicle producer, delivers comparable or superior technology at prices Mercedes simply cannot match without eroding its luxury positioning. Meanwhile, Xiaomi’s rapid expansion into premium EVs has intensified a price and innovation war that European brands are struggling to keep up with.
Chinese buyers who once paid extra for German prestige are increasingly opting for domestic brands that offer better software, longer range, and smarter features — often for thousands less.
This isn’t a temporary demand dip. It’s a shift in consumer logic.
And that’s far harder to fix.
The biggest restructuring in company history
Mercedes’ response has been aggressive.
Under its “Next Level Performance” programme, the company aims to cut €5 billion in annual costs by 2027, with roughly half coming from workforce reductions. Up to 30,000 non-production roles — including engineers, IT staff and managers — are being eliminated through voluntary severance.
Packages for senior employees reportedly reach €500,000. About 4,000 staff had already exited by October.
Production is also being trimmed. German output will fall by around 100,000 vehicles, while some manufacturing is shifting to Hungary, where labour costs are roughly 70% lower. Back-office functions such as finance and HR are being outsourced.
CEO Ola Källenius framed the reset as disciplined management in a tougher market. But investors note the company had already downgraded guidance twice — hardly a sign of stability.
2026: Still stuck in low gear
If 2025 was painful, the outlook offers little comfort.
Mercedes expects car division margins of just 3–5% in 2026 — barely above breakeven for a luxury automaker and well below market expectations. Group EBIT should improve “significantly,” but only relative to an already depressed base. Free cash flow is projected to soften slightly.
External pressures are stacking up:
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US tariffs squeezing export profits
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Currency headwinds
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Intensifying Chinese competition
To respond, Mercedes is localising faster in China. Partnerships with Momenta for autonomous driving and ByteDance for AI integration aim to tailor vehicles to local tastes. Seven China-specific models are also in development.
It’s a tacit admission that the old “global platform” strategy no longer works in a market that behaves more like consumer tech than traditional automotive.
Not just a Mercedes problem
The broader European auto sector faces similar strain.
BMW reported an 8% revenue decline and a 29% profit drop in early 2025.
Volkswagen has gone through plant closures and layoffs.
For Germany, where autos account for roughly 5% of GDP and employ more than 800,000 people, the consequences are systemic.
The problem isn’t just competition — it’s the business model itself.
European brands built premium hardware businesses around brand heritage and pricing power. Chinese rivals treat the car like software: update fast, innovate constantly, price aggressively.
That model scales faster.
Right now, it’s winning.
The bottom line
Mercedes-Benz is still profitable. It still sells close to two million vehicles annually. The brand remains iconic.
But margins are compressing, its biggest growth market is eroding, and management isn’t promising a near-term recovery.
For investors and policymakers alike, the message is clear: this isn’t a bad quarter.
It’s a turning point.
The three-pointed star still shines — just not as brightly as it once did.
