Mercedes-Benz shares experienced a significant decline, dropping more than 6%, following the company’s announcement of a downward revision in its 2024 profit margin outlook. This marks the second time Mercedes has downgraded its forecast within two months, attributing the revision to weaker demand from China—the world’s largest car market—and ongoing trade disputes. The luxury carmaker cited a deteriorating macroeconomic environment in China and a prolonged downturn in the country's real estate sector as key factors behind the subdued consumption.

Mercedes now expects its group earnings before interest and taxes (EBIT) to be "significantly below" the previous year's levels. The company also forecasted an adjusted return on sales between 7.5% and 8.5% for 2024, down from the earlier estimate of 10% to 11%. Consequently, shares ended 6.8% lower by the session close, bringing Mercedes-Benz Group’s stock to its lowest level in nearly two years.

This announcement had a ripple effect across the European automotive sector, with shares of Volvo and Stellantis also dropping 4.5% and 3.4% respectively. The auto sector as a whole fell by 3.6% on the news. Analysts express that while the profit warning was somewhat anticipated, the extent of the downgrade was more severe than expected. UBS analysts noted that Mercedes’ larger-than-expected profit warning compared to its peers would likely lead to further negative perceptions and downgrades from investors.

In July, Mercedes had already adjusted its profit margin outlook due to similar concerns. Moreover, fellow German automaker BMW also recently lowered its profit margin outlook following slumping sales in China and issues with a braking system supplied by Continental, illustrating a broader issue affecting the sector.

Economic downturn in China, particularly within its real estate sector, has significantly impacted the demand for luxury vehicles, exacerbating an already tense trade environment between the European Union, the U.S., and China. Germany, heavily dependent on the auto industry, has particularly voiced concerns over potential EU tariffs on Chinese electric vehicles, arguing they may hinder business in one of its crucial markets.

As a measure to address these challenges, the EU and China have agreed to further discussions on trade measures, including reconsidering a minimum-price deal previously declined by Brussels. This move indicates a potential shift in the EU's approach towards trade negotiations with China, sparked by China's strategic "carrot and stick" tactics.

Ola Kaellenius, CEO of Mercedes-Benz, highlighted the cautious sentiment prevailing within the company regarding the foreseeable future in China. Harald Wilhelm, the group’s finance chief, stated that the company would be reviewing comprehensive measures to enhance contribution margins and seek further efficiencies to mitigate the impact of this downturn.

Despite the challenging economic climate, Mercedes-Benz remains steadfast about improving operational efficiency and fortifying its market position, although the exact duration of these adverse conditions remains uncertain.