Mercedes-Benz faces significant challenges as it grapples with declining demand and profits, especially following disappointing sales in China. The company reported a 28% drop in earnings and plans cost-cutting measures, which may include reduced bonuses and potential job cuts. Production will shift to Hungary to capitalize on lower labor costs, despite a commitment to not close German plants. The outlook for 2024 remains bleak, with expectations of further declines in sales and operating profits.
Mercedes-Benz is navigating through challenging waters as demand and profits take a nosedive, revealing cracks in its luxury market strategy. A focus on immediate cost-cutting measures, particularly affecting the workforce, is on the horizon.
Last year, Mercedes-Benz experienced a considerable decline in profits, largely driven by disappointing sales in China. The DAX-listed company announced a staggering 28 percent year-on-year drop in earnings, totaling 10.4 billion euros.
The adverse performance in 2024 can be attributed to a reduction in vehicle sales in China, coupled with weak demand across Europe. Revenue also saw a decline of 4.5 percent, falling to 145.6 billion euros, with similar downturns in both the car and van sectors. These results fell within a revised forecast that had been adjusted downwards twice in the previous year.
German automakers, including Mercedes, are grappling with decreased revenue and profit margins, particularly evident in the first quarter of the year.
Cost-Cutting Initiatives Announced
CEO Ola Källenius characterized the results as stable amidst a tough market landscape, unveiling a new ‘performance program’ aimed at implementing significant savings.
Källenius indicated that the company will pursue strategies to enhance efficiency, aiming to become more agile and competitive. Plans include bolstering the direct sales model and achieving a ten percent reduction in production costs by 2027.
The German automotive sector is currently experiencing a combination of job reductions, profit declines, and labor strikes, reflecting a challenging climate for the industry.
Uncertain Outlook for 2024
Looking ahead, the car manufacturer anticipates little improvement in the current year. Expected sales and revenue may fall slightly below last year’s figures, with operating profits projected to decline further.
As a result of the profit downturn, the dividend for shareholders is set to decrease. The board and supervisory board intend to propose 4.30 euros per share at the annual general meeting in May, down from 5.30 euros the previous year.
Bonus Reductions on the Table
In light of the financial situation, employees will also bear some of the burden of the cost-saving measures. The works council has communicated a ‘horror list’ of proposed cuts in a special edition of the employee newsletter, which includes reductions in annual success bonuses and the elimination of long-service anniversary payments.
The potential savings from the bonus program, which rewards 90,000 salaried employees in Germany, could be substantial. With an average bonus of 5,000 euros, this could save the company around 450 million euros annually.
The works council has also indicated that job cuts may be on the horizon, despite a current employment guarantee protecting workers until 2030.
Shifting Production to Hungary
To further reduce costs, Mercedes-Benz plans to shift production capabilities to countries with lower labor expenses. CFO Harald Wilhelm revealed that the share of production in these low-cost regions will rise from 15 to 30 percent over the coming years.
Wilhelm assured that no plants in Germany would be closed; however, production capacity is expected to decrease by 100,000 units in Germany over the next three years, while increasing by 200,000 units in Kecskemet, Hungary, where labor costs are 70 percent less than in Germany. A compact model will be relocated to Hungary as part of this strategy.
Challenges Facing Mercedes-Benz
Currently, Mercedes is grappling with numerous challenges: the company sold four percent fewer vehicles than in 2023, with a sharp drop in demand from China. Sales in Germany have also not met expectations, and the performance of electric vehicles has been disappointing, with a 23 percent decline in their market share compared to the previous year.
In response to inquiries, Mercedes acknowledged the extreme volatility in the global economic situation, emphasizing that enhancing efficiency is crucial for maintaining financial stability. The company plans to save several billion euros annually across all cost categories in the coming years.
The outlook for 2025 appears grim, impacted by a sluggish automotive market and potential import tariffs in the USA, coupled with a limited introduction of new models. However, the company is set to launch the compact electric car CLA, which boasts an extended range and rapid charging capabilities. Mercedes has plans for dozens of new models, including traditional combustion engines, as investments are expected to continue rising.
Efficiency Concerns at Mercedes-Benz
Stefan Reindl from the Institute for Automotive Economics (IfA) in Geislingen emphasizes that Mercedes needs to improve its efficiency. He points out that personnel costs are excessively high and productivity levels are insufficient. The company must critically assess long-standing structures to remain competitive.
Reindl also calls for employee representatives to engage in this discussion, noting that wages in the automotive sector are notably high.
Works Council: A Call for Broader Solutions
The works council acknowledges the tense situation at Mercedes but voices concerns over the management’s singular focus on cost-cutting. In a union publication, IG Metall representatives argue that merely reducing costs will not address the complex challenges facing the company. They are determined to ensure that employees do not bear the consequences of management’s failures, stating, ‘Cost-cutting alone will not enhance competitiveness and is not a viable strategy.’
Continued Support for Combustion Engines
Electric vehicles have also struggled to meet expectations outside of China. CEO Källenius, who previously emphasized a shift to electric-only offerings by 2030, has now indicated a willingness to continue producing combustion engines into the 2030s, depending on market demand.
The anticipated turnaround may hinge on new model launches, with the electric version of the compact CLA expected to debut by the end of the year, produced at the Rastatt facility.