Mercedes Is Losing China — And Why Its Worst Year in a Decade Proves It

QUICK ANSWER What’s happening? Mercedes-Benz reported a 57 percent drop in operating profit for 2025, with EBIT falling from €13.6 billion to €5.8 billion — worse than analyst forecasts. Revenue fell 9 percent to €132.2 billion. China sales collapsed 27 percent as BYD and Xiaomi undercut the German carmaker on price and technology. Mercedes is cutting up to 30,000 jobs and targeting €5 billion in savings by 2027. Its 2026 outlook offers no relief: car margins are guided at just 3 to 5 percent. The German luxury carmaker’s full-year results landed worse than anyone expected — and its 2026 guidance suggests the pain is far from over.

Mercedes-Benz on Thursday reported a sharper-than-expected collapse in profitability, with full-year operating earnings falling 57 percent to €5.8 billion as the company’s position in China deteriorated faster than its cost-cutting programme could compensate. The result, which missed analyst forecasts of €6.6 billion, marks the steepest annual profit decline in more than a decade for a company that just two years ago was earning record margins on the back of post-pandemic pricing power.

Revenue dropped 9 percent to €132.2 billion, also below expectations. The core passenger car division delivered an adjusted return on sales of just 5 percent — the bottom of the range Mercedes had guided to, and a figure that would have been considered unacceptable at the company’s strategy day as recently as 2023, when management was targeting double-digit margins.

China: From Cash Cow to Crisis

The numbers tell a story of structural erosion in what was once Mercedes-Benz’s most profitable market. China sales fell 27 percent year-on-year in the third quarter of 2025, the sharpest decline across any region. For the full year, China contributed just 15.9 percent of group revenue — a share that has been shrinking steadily as domestic competitors have surged.

The competitive threat is no longer theoretical. BYD, now the world’s largest electric vehicle manufacturer, is producing cars with comparable technology at price points Mercedes cannot match without destroying its brand positioning. Xiaomi’s entry into the premium EV segment has added another front to a war that European carmakers are losing on home turf. Chinese consumers who once paid a premium for the three-pointed star are increasingly choosing domestic alternatives that offer more advanced software, longer range, and significantly lower prices.

This is not a cyclical dip. It is a structural market shift of the kind that has already reshaped other European industries — and the German automotive sector is now squarely in its path.

The Largest Layoff in Mercedes History

In response, Mercedes has launched the most aggressive restructuring programme in its history. Under the banner “Next Level Performance,” the company is targeting €5 billion in annual savings by 2027, with roughly half of that to be achieved through headcount reduction. Up to 30,000 non-production employees — engineers, IT staff, administrators, and middle managers — have been offered voluntary severance packages, with payouts reaching as high as €500,000 for senior staff with long tenure.

Approximately 4,000 employees had accepted severance offers by the end of October, with the programme running through to March 2026. German production is being cut by around 100,000 units, and parts of the manufacturing process are being shifted to Hungary, where labour costs are roughly 70 percent lower. Finance and human resources functions are being outsourced.

CEO Ola Källenius framed the results within the context of strategic discipline. “Amid a dynamic market environment, our financial results remained within our guidance, thanks to our sharp focus on efficiency, speed, and flexibility,” he said. But the guidance itself had already been downgraded twice during the year — a trajectory that mirrors the kind of expectation management European businesses have had to adopt across multiple sectors.

2026 Outlook: No Relief in Sight

Perhaps more concerning than the 2025 results is what Mercedes is signalling for the year ahead. The company guided to a car division margin of 3 to 5 percent for 2026 — well below the 5.6 percent consensus and barely above breakeven territory for a luxury manufacturer. Group EBIT is expected to be “significantly above” 2025 levels, but that bar is historically low. Free cash flow is forecast to come in slightly below last year.

The headwinds are multiple and reinforcing. US tariffs on European automotive imports continue to compress margins on transatlantic shipments. Currency effects, particularly the weak euro-dollar dynamic, are eating into reported earnings. And China shows no sign of stabilising — if anything, the competitive intensity is increasing as Chinese manufacturers move upmarket, targeting precisely the premium segment that Mercedes has always considered its fortress.

Mercedes is responding in China by accelerating localisation. The company has announced partnerships with Momenta for urban autonomous driving and with ByteDance to integrate AI-driven features, while targeting a 10 percent reduction in local material costs and a 20 percent cut in variable production costs by 2027. It is also developing seven China-exclusive models — an acknowledgement that the one-size-fits-all global platform strategy that served German carmakers for decades no longer works in a market where domestic competitors iterate on software and features at a pace that resembles tech startups more than traditional automotive.

What This Means for European Industry

Mercedes-Benz is not an isolated case. BMW reported an 8 percent revenue decline and a 29 percent profit drop in the first half of 2025. Volkswagen has been through its own bruising round of plant closures and layoffs. The entire German automotive sector — which accounts for roughly 5 percent of the country’s GDP and employs over 800,000 people — is undergoing a structural adjustment that has no recent precedent.

The challenge is not simply one of competition. It is one of industrial model. European carmakers built their strategies around high-margin hardware sold at premium prices in markets where brand heritage commanded a pricing premium. That model is being dismantled by Chinese competitors who treat the car as a software platform, iterate rapidly, and price aggressively — all while benefiting from domestic industrial policies and supply chain advantages that Europe’s regulatory environment has been slow to match.

For investors and business leaders tracking the intersection of trade policy, industrial strategy, and competitive disruption, Mercedes-Benz’s results are a warning. The company remains profitable. It still sells nearly two million cars a year. But its margins are compressing, its largest growth market is in retreat, and its 2026 guidance suggests management does not expect the situation to improve. The three-pointed star still shines — but the light, for the first time in a generation, is dimming.

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