Mercedes-Benz is navigating a critical transition phase in China. The luxury automaker is experiencing an unprecedented downturn.
Mercedes-Benz Group's full-year 2025 results reveal a challenging period: Group revenue fell to 132.2 billion euros, down 9.2% year-on-year. Net profit plummeted 48.8% to 5.331 billion euros, nearly halving. Adjusted EBIT declined approximately 40% to 8.2 billion euros. Industrial business free cash flow remained positive at 5.4 billion euros but was significantly lower than the previous year's nearly 9.2 billion euros.
The last time Mercedes saw profits this low was in 2019, when its predecessor Daimler Group reported a net profit of just 2.709 billion euros from car and van sales, a 64% drop. Performance improved in 2020 with a net profit of 4.009 billion euros, and from 2021 to 2024, the group consistently achieved net profits in the tens of billions of euros.
Particularly concerning is the situation in China, a market of great importance to Mercedes. In 2025, Mercedes sold only 575,000 new vehicles in China, a decline of about 19% year-on-year. This sales volume is only slightly higher than the 481,000 units sold in 2016 and represents the largest decline among the German luxury brands Audi and BMW.
Despite the disappointing figures, Mercedes management maintains that the overall performance was within the previously guided range, stating they "held their ground in a volatile environment." During the 2025 earnings call, management signaled intentions to continue cost-cutting and efficiency measures, launch over 40 new models within three years, and expects profits to bottom out and recover in 2026.
With revenue, profit, and sales all declining, the question remains: how will Mercedes navigate this painful transition period?
Where did the profits go? The simultaneous drop in Mercedes' profits and revenue results from multiple pressures. Industry analysts point to US tariffs on European cars squeezing automaker margins, weak European economic growth suppressing car demand, and declining sales in China as primary reasons for the performance slump.
The financial report indicates profit margins were squeezed partly by approximately 1 billion euros in tariff expenses. A significant factor was the "Next Level Performance" cost-reduction plan. This initiative includes voluntary departure schemes for non-production staff in Germany, where generous severance packages created short-term cost pressures. Organizational optimization led to 1.6 billion euros in restructuring costs.
Research and development spending also impacted profits. Although R&D investment saw a slight decrease of 0.4% in 2025, it remained high at 9.68 billion euros. Expensed R&D costs, deducted from current profits, increased by 8.5% to 6.055 billion euros. Furthermore, capital expenditure surged 35.7% year-on-year to 5.482 billion euros.
Mercedes explained that 2025 marked the start of its "largest-ever product and technology launch plan," with over 40 models scheduled for release in the next three years. The company believes both capital expenditure and R&D investment peaked in 2025 and are expected to decline starting in 2026.
Additionally, external observers cite management strategy as a factor in the weak performance. Since Ola Källenius became CEO in 2019, he has driven Mercedes' most aggressive electrification push, repeatedly stating the goal to transform Mercedes into an all-electric car company.
In 2021, Källenius announced the "Electric Only" strategy, planning to invest over 40 billion euros within nine years. The target was for plug-in hybrids and all-electric vehicles to comprise 50% of sales by 2025, with every new model architecture being electric-only, aiming for full electrification by 2030. Subsequently, Mercedes launched EQ series models, gradually shifting from adapting combustion engine platforms ("oil-to-electric") to developing dedicated electric vehicle platforms.
However, like many multinational automakers, Mercedes' electrification transition has not yielded ideal results. In 2025, Mercedes sold only 168,800 all-electric vehicles, a 9% decrease, significantly lower than BMW's 442,000 units and Audi's 223,000 units.
Consequently, in 2025, Källenius revised the "full electrification by 2030" target to a "dual-track" approach, continuing both combustion engine and electric vehicle development. While this "strategic shift" is considered pragmatic, Mercedes must bear the profit losses associated with business restructuring. Previously, US automakers General Motors and Ford announced asset writedowns of $7.1 billion and $19.5 billion, respectively, after adjusting their electrification strategies.
Nevertheless, the core factor dragging down Mercedes' performance remains sales volume. Globally, Mercedes sold 2.16 million new vehicles in 2025, a 10% decline, the lowest level since 2014. Both passenger cars and light commercial vehicles faced significant pressure. The passenger car division, traditionally Mercedes' pillar, saw revenue drop 10.5% to 96.407 billion euros, with EBIT plummeting 57.9% to 3.564 billion euros.
Mercedes sold 1.8008 million passenger cars globally in 2025, down 9%. In North America, sales fell 12% to 320,600 units. The European market was relatively stable, with sales down 1% to 634,600 units. In Asia, passenger car sales faced severe challenges, declining 16% to 747,000 units.
As Mercedes' most important single market, China experienced the most significant "bleeding," causing the greatest impact on group revenue and profit. In 2025, Mercedes passenger car sales in China fell 19% to 551,900 units, with revenue dropping 28.6% to 16.519 billion euros.
Addressing the weak performance of entry-level Mercedes models in China, the company acknowledged facing intense price pressure. Management noted on the earnings call that particularly in Q4 2025, "extreme" price-cutting occurred in China, but Mercedes chose not to follow overly aggressive strategies, deeming them too risky.
However, under strong market pressure, Mercedes had to adjust prices entering 2026. On February 2, a dealers' association stated that, after verifying with multiple Mercedes dealers, the manufacturer adjusted the suggested retail price for some models effective February 1. The adjustments primarily involved official price cuts for three key models: the C-Class, GLB, and GLC, with reductions ranging from 33,700 to 69,020 yuan, up to approximately 10%.
The Remedy for the Chinese Market An industry insider suggests that initially, German luxury brands may not have viewed domestic Chinese brands as direct competitors due to different price segments. However, in 2021, when new energy vehicle market share in China first exceeded 10%, reaching 13.4%, and models like the Li Auto ONE and NIO ES6, priced above 300,000 yuan, broke the previous price ceiling for domestic brands, the German trio were forced to reassess Chinese automakers. In recent years, the strong rise of premium models from Tesla, AITO, and BYD has further eroded Mercedes' market share.
"On one hand, the German brands' new energy products are often priced high without a corresponding product advantage. On the other hand, new EV makers excel at online marketing and shaping public opinion, which is weakening the brand power of traditional luxury marques. Additionally, younger consumers are becoming more pragmatic," the insider said. In his view, the automotive market is now oversupplied, and selling more vehicles inevitably requires continuous price reductions.
China is Mercedes' largest single market. Achieving a breakthrough in China's new energy market is crucial for the success of Mercedes' transformation.
In an interview last August, Källenius described competition in China as "Darwinian," noting over 100 car manufacturers competing, with particularly weak purchasing sentiment in the premium segment Mercedes values. He emphasized the necessity of坚守 the Chinese market but cautioned that investment shouldn't be endless, stating the need to balance market share defense with profitability.
Against this backdrop, the debut of Oliver Thöne, Member of the Board of Management of Mercedes-Benz Group AG, responsible for Greater China, at the 2025 earnings call drew significant attention.
Thöne, who assumed full responsibility for the Greater China region in February 2025, stated that "China will continue to be Mercedes-Benz's most important single market globally," but future development will focus more on optimizing the value chain and improving local profitability.
According to the plan, between 2025 and 2027, Mercedes will launch a total of 40 new models worldwide, including 7 models specifically tailored for the Chinese market, indicating a significant increase in localization efforts.
Thöne revealed that product launches in China will accelerate in 2026, with over 15 new and facelifted products planned across multiple segments. These include key models optimized for Chinese users, like the long-wheelbase all-electric GLC and long-wheelbase GLE, alongside flagship products like the new-generation S-Class. This push aims to strengthen the electric portfolio to compete in China's fierce market. Thöne described this as the most intensive product offensive in Mercedes' history.
Furthermore, Mercedes is expanding local R&D partnerships and accelerating supply chain localization. The company is already collaborating with Chinese tech firms like Momenta and ByteDance. Material procurement will also see increased localization. Mercedes aims, through full supply chain localization upgrades, to reduce local material costs by 10% and cut both variable and fixed production costs by 20% by 2027. The upcoming all-electric GLC is targeted for a 30% cost reduction. The GLE SUV will also get a special version for China, produced at the Beijing plant, whereas it was previously imported from the US.
Coinciding with the earnings release, Mercedes China underwent senior management changes. On February 14, Duan Jianjun, the first local CEO of Beijing Mercedes-Benz Sales Service Co., resigned after a three-year tenure. He was succeeded by Daniel Lescow, a German executive.
Lescow brings over 20 years of experience with Mercedes, having held key positions at headquarters and in regional markets, with a quarter of his career spent in China. He played a crucial role in the electrification transformation of the smart brand and established its global sales and marketing system based in China.
With new management in place and a renewed product offensive underway, the key question is whether Mercedes can defend its share of the premium market while improving profitability. The year 2026 may prove decisive for the success of its transformation.
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