Mercedes-Benz Group cut its full-year profit outlook after its car sales in China fell 31% in the third quarter, and it now expects 2026 group earnings before interest and taxes to come in only at last year's level rather than significantly above it.

For investors in Asia, the warning is a reminder of how far the balance of the Chinese premium car market has shifted. In the July-to-September quarter Mercedes sold 86,800 passenger cars in China, barely half its European volume, and its total passenger-car volume in Asia fell 25% to 132,300, according to sales figures reported by Gasgoo.

Mercedes-Benz Lowers Its Car Margin Target

The Stuttgart-based company announced the change in an ad hoc statement on Oct. 27, a day before it published its full quarterly report. It blamed an "increasingly challenging market environment in China" and higher costs expected in the fourth quarter, including for materials.

The new guidance cuts the adjusted return on sales for the Mercedes-Benz Cars division to between 2% and 3%, from a range of 3% to 5%. Free cash flow from the industrial business is now expected to be significantly below last year, compared with an earlier forecast of slightly below. Targets for the vans unit (an adjusted return on sales of 8% to 10%) and for financial services (an adjusted return on equity of 12% to 14%) were left unchanged.

The third quarter itself was better than analysts had expected on most measures. Group EBIT was 1.77 billion euros, against a consensus of 1.6 billion euros cited in the company's statement. The car division's adjusted return on sales was 2.5%, slightly above the 2.4% analysts forecast, and vans came in at 9.4% against an expected 9.1%.

Financial services also beat forecasts, with an adjusted return on equity of 13.8% against an expected 12.4%. The vans business held steady: unit sales rose 1% to 84,400, and electric van deliveries grew 12% to 9,600, Gasgoo reported. Including vans, group unit sales fell 6% to 491,700.

Cash was the weak spot. Free cash flow from the industrial business was 172 million euros, well short of the 422 million euros analysts had pencilled in.

A Low Base Flatters the Profit Line

Revenue fell 4.5% to 30.7 billion euros, according to a dpa-AFX report published by Börsen-Zeitung. Net profit rose about 28% to roughly 1.52 billion euros, and EBIT more than doubled from 750 million euros a year earlier. Both comparisons were helped by a weak third quarter of 2025, when special charges for job cuts weighed on results, the report said.

The shares fell after the warning on Oct. 27. By the following day, when the full report came out, the loss had narrowed to 0.7%, according to the same report.

Reuters, in a report carried by South Africa's TimesLIVE, said slowing demand and intense competition from local manufacturers are eroding the sales and pricing power of German brands in China.

China Slide Offsets Gains in Europe and the U.S.

Mercedes delivered 407,200 passenger cars worldwide in the quarter, down 8% from a year earlier. Outside China, car sales rose 1%.

Europe was the strongest region, with deliveries up 5% to 168,700 and Germany up 13%, Gasgoo reported. U.S. sales rose 6% to 75,300 cars. Battery-electric deliveries reached a record 68,400, up 61%, and made up 16.8% of all passenger cars sold.

The most expensive models also suffered. Sales of top-end vehicles in China fell 21% to 53,900, which Gasgoo linked to soft demand and model changeovers.

Mathias Geisen, the board member responsible for sales, said European allocations of the electric GLC, CLA, GLB and GLA models were sold out for the rest of 2026, and that plants in Bremen, Rastatt and Kecskemét in Hungary had moved to three shifts, according to Gasgoo.

The trade backdrop between Europe and China has eased slightly. Brussels and Beijing recently reached an understanding on hybrid vehicles and faster rare earth licenses, which matters for European carmakers that depend on Chinese components and magnets.

Over the first nine months, Mercedes sold 1.244 million passenger cars, down 7%. The car division's third-quarter margin of 2.5% sits in the middle of the new 2% to 3% range, leaving the fourth quarter to absorb the higher material costs management has already flagged.