Mercedes, BMW flash warning lights on China
Summary
Top-end German carmakers have joined expensive French handbags among the products hit by weak consumer sentiment in the country.
China’s weak consumer economy has claimed another victim: luxury cars.
Mercedes-Benz late Thursday became the second luxury carmaker in as many weeks to cut its earnings guidance for the year. Like its Bavarian rival BMW, which warned on profits last week, the Stuttgart-based company blamed the downshift on affluent consumers in China growing more cautious, among other reasons.
“We wanted to do more, but when in your biggest market your main clientele in all sorts of regards is sitting on the fence, it makes it certainly more difficult," Chief Executive Ola Källenius said on a call with analysts Friday. The car maker’s stock fell 6% in European morning trading.
The warnings from southern Germany echo the more cautious tone of the French luxury industry in recent months. Handbag makers such as LVMH and Kering have spooked investors with declining sales in the crucial Chinese market.
Problems at Mercedes and BMW also signal deepening troubles for the global auto industry, which is contending with the impact of high interest rates and a costly shift to electric vehicles. China’s luxury car market had until recently been a relative bright spot, with consumers still favoring traditional engines and lucrative top-end models such as the Mercedes-Benz S-Class.
This year, the mood has turned: In the eight months through August, customers in China bought 10% fewer cars from Mercedes and 11% fewer from BMW, according to vehicle-insurance data collated by brokerage Bernstein.
While a government trade-in policy has revived Chinese car sales overall in recent months, it doesn’t apply to vehicles with larger engines, which are often made by German companies. This has left them at the mercy of local consumer sentiment for some of their most profitable models against a backdrop of falling property prices.
Germany’s high-end brands have been reluctant to get dragged into a price war that continues to grip the mainstream Chinese car market, even if it means sacrificing sales.
Porsche’s sales dropped by a third in the first half as it stuck doggedly to a “value over volume" strategy in the country. The sports car brand, which is majority-owned by Volkswagen, replaced its China boss this month.
The VW brand itself, the longtime market leader in China, has been struggling for several years as consumers buy more EVs, notably from low-cost champion BYD. Since July, more than half of new passenger-car sales in China have been plug-ins.
Falling income from VW’s Chinese joint ventures and once-lucrative licensing arrangements is forcing the company to contemplate factory closures in Germany, provoking a noisy clash with the company’s powerful union.
While both Mercedes and BMW have pointed to macroeconomic rather than competitive pressures, the emergence of local players with innovative EVs aimed at more affluent consumers is another investor concern.
Companies such as Li Auto, XPeng and NIO may be starting to draw more tech-forward wealthy consumers in China away from the German brands, according to analysts, even as the startups struggle to deliver consistent sales or financial results in a scrappy, fast-moving EV market.
“There is no reason why what is happening in the mass market won’t happen in the premium segment over time," said Jefferies analyst Philippe Houchois.
BYD, which has taken over from VW as the market leader, also has designs on wealthier consumers, though it hasn’t made deep inroads so far. It launched a brand called Denza with Mercedes in 2011, but sales have been limited. Mercedes sold its remaining 10% stake back to its Chinese partner earlier this week.
Like France’s fashion houses, Germany’s carmakers are highly dependent on the Chinese market, which last year accounted for 36% of unit sales at Mercedes, 32% at BMW and 25% at Porsche. Historically, sales in the country came with fatter margins than elsewhere because consumers favored more expensive models.
Following the guidance cuts, Mercedes and BMW both expect their key profit target this year to be “significantly" below last year’s level—language implying a more than 10% fall, according to the companies’ guidelines. They previously said it would be “slightly" below, meaning a decline of less than 5%.
The magnitude of the changes took analysts and investors by surprise. BMW shares fell 11% on the day of its warning last week, the most since the panic caused by the Covid-19 pandemic of March 2020.
Both companies also gave reasons unrelated to China for the sharp deterioration in their outlook. At BMW, a faulty braking module made by industry supplier Continental could cost it almost a billion euros, or $1.1 billion, to fix. Replacing the units, which are buried deep in the car, is labor intensive.
Meanwhile, Mercedes is making “valuation adjustments," partly to help shift slow-selling electric vehicles. They are expected to amount to 1% of its revenues in the second half, which would work out at roughly €850 million based on current estimates.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
