Mercedes-Benz reduced its projection for yearly profit margin on Friday due to poor sales and profitability for the second quarter, but it still believes that new models will help it fight tough competition in China in the second half of the year.

Lacklustre demand for electric vehicles (EVs), severe domestic rivalry in China, supply constraints, and continuously high loan rates have been a problem for German automakers.

Mercedes stated that while EV sales have fallen short of forecasts, it anticipates a spike in plug-in hybrid sales in the second half of 2024 due to increased demand for hybrid vehicles in the European and American automotive markets.

The automaker has lowered its earlier target range of 10-12% to an adjusted return on sales in the region of 10-11% this year.

The company’s shares fell 1.4% in early trade as a result of the worse outlook.

In a client note, Bernstein analysts stated that although some investors had anticipated a profit warning, Mercedes’ decision to just lower its margin target “will likely be met with relief.”

The company’s automobile segment outperformed analysts in terms of adjusted profitability in the second quarter, with a 10.2% return on sales.

Mercedes reported a 6% decline in sales in the first half, including a 17% decline in sales of electric vehicles.

In a client note, Citi analysts stated, “Overall, Mercedes execution has recovered, but overall sales and top end sales mix have remained weak.”

Mercedes acknowledged that the economic situation was unclear but also said that it saw “solid momentum” for demand and sales in the US market as well as increasing market mood in Europe.

It does, however, have a “cautious view” of China, expecting fierce competition in both its core and entry-level model categories as it “seeks to successfully defend its leading position” in the market for high-end automobiles.

During a conference call with investors, CEO Ola Kaellenius stated that the carmaker will keep its adaptable strategy of providing customers with both fossil fuel and electric models depending on demand.

However, he stated that due to the rapid uptake of electric vehicles in the biggest auto market in the world, China, the industry must contend with EVs.

“That’s a race you’ve got to be in,” Kaellenius said.

In contrast to LSEG’s prediction of a 26% reduction, the group revealed a 27.5% drop in adjusted earnings in its automotive segment during the second quarter.

Earnings before interest and taxes (EBIT) decreased 19.1% for the group during the quarter, in accordance with LSEG’s prediction.

(Adapted from Business-Standard.com)