Autonews — 2025-02-20
Automotive Industry
Mercedes-Benz Group is cutting production capacity in Germany and moving some output to low-cost countries as it grapples with fierce competition and uneven demand in the global auto market.
The automaker said it plans to cut production costs by 10% through 2027 and will also work with suppliers to reduce material costs. Global prices for everything from chemical coatings to metals have risen in recent years.
Mercedes’ operating earnings slumped 30% last year, the automaker said on 20 February. Its automotive margin dropped to 8.1%, below the previous year’s 12.6 %. The car division had a 40% slump in 2024 earnings as sales in the key Chinese and German markets took a battering.
Mercedes expects its automotive margin to drop to as low as 6% this year. After pledging to boost margins to a minimum of 8% less than three years ago, the new guidance marks a blow to Mercedes’ strategy of shifting upmarket to secure higher returns.
Global sales are projected to be lower than the 1.98 mn vehicles sold in 2024, a prediction likely to disappoint investors and labor representatives, who had called for a minimum sales target of 2 mn cars to fully utilize production capacity.
“To ensure the company’s future competitiveness in an uncertain world, we are taking steps to make the company faster, leaner, and stronger,” CEO Ola Kallenius said.
German capacity cuts; more ICE launches than EVs
Mercedes will reduce the capacity of its German plants to about 900,000 cars from around one million. There are no plans to close plants in Germany but jobs will be cut through natural attrition.
Kallenius would not say how many jobs could be affected in Germany.
Mercedes plans to shift production of one of its compact cars from Germany to its plant in Hungary, where costs are 70% lower, CFO Harald Wilhelm said.
It will also outsource areas from finance and human resources to procurement, he said.
To shield itself from tariffs and trade tensions, the carmaker will increase the number of cars produced within the market in which they will be sold from 60% to 70% globally, with a particular focus on China and the U.S.
The US factory, in Vance, Alabama, is likely to get another “core” model, meaning a C- or E-Class vehicle, Kallenius said. The light truck factory builds the GLE, GLE Coupe and GLS, including EV variants.
According to a supply chain source, Mercedes could begin building GLC crossovers in the US in the second quarter of 2027. The source told Automotive News GLC volumes could hit 50,000 vehicles in the first full manufacturing year.
It is not known which powertrain Mercedes would build in Alabama. The compact GLC was the second best-selling model in the US last year with 64,163 vehicles sold.
Kallenius told journalists on 20 February that adding another model in the US was not necessarily linked to the impact of potential tariffs, but that Mercedes sees the US as a growth region.
“After decades of successful dealings in the US, we want to take part more actively,” he said. “The US is a market where we can grow. We’re always asking, what’s the next product there?”
Mercedes also said it will launch more gasoline and diesel cars than battery-electric cars in its new product range in a bid to revive margins.
The company will release 19 new combustion engine models and 17 battery-electric cars by the end of 2027, in a sign of a renewed focus on its combustion engine offering after its BEV sales collapsed by a quarter last year.
Most of the new models will be in its top-end price tier, showing that the carmaker is still committed to its strategy of selling a lower volume of higher-margin vehicles, despite some investors and labor representatives expressing concern in recent months that the strategy had failed.
“The strategy of value over volume remains in place — it has not been abandoned,” Wilhelm said, adding it was good news for its margin that combustion engine cars were still far outselling electric vehicles.
Like other European automakers, Mercedes has seen flagging demand for its vehicles in key markets. Demand in Europe remained below pre-pandemic levels and Chinese consumers opted for more affordable domestic electric models amid an uncertain economy.
Part of the decline has been driven by the rocky transition to electric vehicles, with EV sales falling short of expectations despite heavy investments. Many automakers have had to cut costs and return to upgrades for their combustion-engine lineups.
Boost from new models, S-Class face-lift
Mercedes said the release of new models and a refresh of the S-Class for 2026 will eventually boost demand for its vehicles. Wilhelm said he expected the company’s margin would rise toward at least 10% by 2027.
The automaker has been directing resources to its most expensive vehicles and shifting away from less profitable entry-level models such as the compact A-Class. But weak demand, particularly in China, for top-end vehicles like Maybach limousines, AMG performance cars and the G-Class has been weighing on the strategy.
Mercedes’s new guidance is a sobering reassessment of the more optimistic vision it outlined in 2022 of an adjusted return on sales of up to 14% in good times and no less than 8% in difficult ones.
Europe’s carmakers face challenges this year, from tightening carbon emissions targets in Europe to rising trade tensions with the US and fierce competition from Chinese EV startups.
President Donald Trump’s plan to impose car tariffs poses a serious threat to Mercedes, which imports about 63% of the vehicles it sells in the US Trump said this week that he plans to announce as soon as April levies of around 25 percent on imported autos.