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Hit by US tariffs, high energy costs in Europe and plummeting sales in China, Mercedes-Benz's operating profits fell 57% in 2025. A sign the iconic brand's sheen is fading or a broader issue with legacy carmakers?
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00:00Is the sheen of the three-pointed star fading?
00:04Has stiff competition from software-forward Chinese brands
00:07dealt Mercedes a knockout blow?
00:10All foreign automakers who have been operating in China
00:15were hit hard by this price.
00:18And has the German heavyweight's own strategy of luxury first
00:22simply not paid off?
00:23Mercedes have pushed far too high upmarket.
00:27What went wrong for Mercedes-Benz?
00:30And can the falling star rise again?
00:32We have a rock-solid balance sheet to take on the next phase of transformation.
00:37REV delves in.
00:402025 was a turbulent year for Mercedes-Benz.
00:44A 57% plunge in operating profits,
00:47a 9% dip in global car sales,
00:50and a 19% drop in sales in China, its most important market.
00:55Plus external factors, tariffs imposed by the US,
00:58totaled roughly $1.2 billion.
01:01High energy prices in Europe,
01:04a fallout of Russia's invasion of Ukraine,
01:06pushed up production costs consistently.
01:09And adverse foreign exchange rates
01:11that meant earnings generated abroad
01:13translated into fewer euros on the balance sheets.
01:18While all these factors go some way towards explaining the reasons behind the dramatic decline,
01:23they don't indicate when this downturn might end.
01:27Indeed, Mercedes' own projections suggest that profit margins will remain compressed in 2026,
01:33which raises a fundamental question.
01:36Is this a temporary blip or is it something deeper shifting within the company?
01:40To answer this, we need to look beyond the numbers
01:43and examine the strategy that shaped Mercedes in recent years.
01:48They made some strategic moves or strategic decisions
01:53that turned out to be not like the best.
01:56And they corrected some strategic mistakes of the past.
02:01In particular, we saw like four strategic U-turns within the last 18 months.
02:06The first was Mercedes' focus on the luxury segment,
02:10something CEO Ola Kalenius had been sure was the right move for the brand
02:15under his economics of desire strategy.
02:18The company's goal was to sell more luxury cars,
02:22focusing on margins instead of volume.
02:25It proved to be a tightrope walk that didn't pay off.
02:29The trouble is that luxury is more than just about the sophistication of the car,
02:36the price of the car and so on.
02:38It's also about exclusivity.
02:40You cannot have mass volume presence with luxury
02:46because you erode that exclusivity.
02:49And so this is a very difficult line to tread
02:51for a company like Mercedes, which has quite a lot of high fixed costs.
02:56That strategy has been largely reversed now,
03:00with attention being refocused on volume-oriented offerings like the A-Class.
03:04Despite initial hiccups, the A-Class was a success.
03:08The first generation sold around 1.1 million units between 1997 and 2004,
03:14proving it was a volumes product.
03:16But since the car didn't align with the brand's luxury-only strategy,
03:21it was being phased out.
03:23Now, not only does the A-Class remain in production,
03:26a successor is in the works.
03:31Mercedes had also positioned itself as a leader in assisted driving.
03:36It was the first manufacturer to receive international approval
03:39for Level 3 autonomous driving technology with its drive-pilot system.
03:45But with limited demand and regulatory frameworks proving to be slow,
03:50the resources devoted to expensive driverless tech
03:53have now been reduced and reallocated.
03:55Perhaps Mercedes' biggest U-turn relates to its EV strategy.
03:59In line with its long-term luxury goals,
04:02the brand initially focused on large premium electric models
04:05with significant battery capacity and even more significant price tags.
04:10But these only appealed to a very small demographic.
04:13Mercedes have pushed far too high upmarket.
04:17They've tried to sell large SUV-style or very expensive sports car-style electric vehicles
04:25for which there is a limited demand at the best of times.
04:29Then there was the EQ sub-brand itself.
04:32Instead of integrating electric vehicles seamlessly into Mercedes' core design language,
04:38the company created a separate identity with distinct styling and branding.
04:44The intention was to signal a bold electric future,
04:48but it diluted one of Mercedes' strongest assets,
04:52its instantly recognisable design and heritage.
04:57The fallout was dramatic, particularly in China, its most crucial market.
05:03The EV market is a shock tank right now.
05:05We have like more than 100 EV brands arising within China and compete against each other.
05:11And in this kind of situation, Mercedes decided to not use their biggest asset,
05:18like their iconic design, their brand,
05:20and just like introduce a new brand and be just one of many.
05:24Mercedes is now reintegrating its EVs into its core brand identity,
05:30ditching the EQ sub-brand.
05:31It hopes this will revive sales, especially in China.
05:35Which brings us to the China conundrum,
05:38as it's here Mercedes' mistakes were amplified the most.
05:41Reduction in sales is mainly down to managing the fierce competition in China.
05:49So that is where you will find the major part of that reduction.
05:54Where we don't go for market share at all costs.
05:57For all German car makers, China is a vital market,
06:01and one that's embraced the transition to EVs.
06:04In 2025, new energy vehicles comprised over 50% of all car sales in China.
06:10And its car market is saturated with sleek, futuristic EVs from domestic manufacturers,
06:16often priced more competitively than any EVs that Mercedes has on offer.
06:21Still, discounts aren't an option.
06:24All foreign automakers who have been operating in China were hit hard by this price war.
06:31A lot of the value you pay when you buy a Mercedes is connected to the brand.
06:38So, Mercedes has kind of a problem.
06:42If you see a Mercedes with a discount of 30% to 40%,
06:45then kind of consumer perception is shifting.
06:49Is this really like the status symbol?
06:51Is this really the luxury brand which I always learned it was?
06:57And while traditional German car makers, including Mercedes,
07:01suffered growing pains trying to go electric,
07:03some Chinese car makers started with a clean slate.
07:07Now they're building tech-packed machines that appeal to the average Chinese car buyer,
07:12who, at around 30, is 20 years younger than the average German one.
07:18In China, cars are often thought of as connected devices,
07:22valued for software, interfaces and updates,
07:26not just engineering and heritage alone.
07:28In China, German car brands, and especially Mercedes,
07:34are bought for their combustion cars.
07:36But when consumers want to buy a software-defined EV,
07:40a German brand is not what comes to their mind.
07:43You see some of the sophistication of that coming out of China
07:47at the moment is quite astonishing.
07:48The cleverness in the design inside,
07:51the sophistication, the flexibility,
07:55just outpaces anything that you see in Europe.
07:58And so I think there has to be a lot more work
08:01on developing things,
08:03which the industry has traditionally called surprise and delight features.
08:07There's not enough of that inspirational aha moment
08:12coming out of the German industry and German design at the moment.
08:17In 2024, Mercedes sold around 680,000 cars in China,
08:22down 7% from the year before.
08:24The further drop in sales in 2025
08:27doesn't just have to do with the vehicles on offer.
08:29It's also a product of China's current economic climate,
08:33where a property sector crash and deflation
08:36mean people simply aren't buying as many cars as they used to.
08:39Though even taking that decline into account,
08:43China remains the industry's most important battleground.
08:48China is kind of the ground zero right now of the automotive industry.
08:53Meanwhile, Chinese brands are expanding globally,
08:56exporting their EV expertise
08:58and proving to be stiff competition for legacy car makers.
09:01For decades, German manufacturers relied on their engineering know-how,
09:06believing a well-built machine would be successful anywhere in the world.
09:10But there is no one-size-fits-all product strategy
09:13that works across multiple markets.
09:16Although for many years,
09:18the car industry has tried to create
09:19a more homogenous global market for cars
09:22in the interest of economies of scale in manufacturing,
09:25that basically hasn't worked,
09:27that we still see strong,
09:29at least regional, differences in markets.
09:32Which is precisely why,
09:34although it's cost-intensive,
09:35a brand like Mercedes
09:36cannot afford to abandon any powertrain.
09:39Under the Trump administration,
09:41combustion engines remain crucial in the United States
09:44and in emerging markets.
09:47Hybrids offer a transitional bridge
09:49where infrastructure or consumer readiness is still evolving.
09:53And electric vehicles are essential in China,
09:56as well as for Europe's climate goals.
10:00We live in a heterogeneous world.
10:04Adoption towards electrification
10:06in the 150-plus markets that we serve around the world
10:10is not the same everywhere.
10:12And it is clear to us
10:14that for the foreseeable future,
10:17minimum the next 10 years,
10:19probably a little bit longer,
10:20it will be in all of the above scenarios.
10:22If you are a legacy automaker
10:24who's active in all those three world markets
10:27in China, in Europe, and in the US,
10:30you kind of have to develop
10:31like two different product lines.
10:34You have to develop like competitive combustion engine cars
10:38and you have to develop competitive EVs.
10:41And that makes it incredibly expensive,
10:45especially if you compete with like focus players,
10:49for example, like Tesla or BYD,
10:51who solely focus like on one technology.
10:54Despite the profit slump,
10:56not all regions are weakening.
10:58Mercedes saw around 17% growth
11:00in what it calls the rest of the world,
11:02meaning markets outside its core regions
11:04of Europe, China, and North America.
11:07This includes developing markets
11:09where demand for premium ICEs and hybrids
11:11remains strong,
11:12giving the carmaker opportunities for growth
11:14and a chance to build back its free cash flow,
11:17which at 5.4 billion
11:19was significantly less than in 2024.
11:21So Mercedes is upbeat.
11:24In this eventful 2025,
11:28that 5.4 billion stands out
11:30as one of the most solid numbers
11:32on cash flow production of any car company.
11:35Our net industrial liquidity remains above 30 billion.
11:39So we have a rock-solid balance sheet,
11:41a rock-solid balance sheet
11:42to take on the next phase of transformation,
11:45which will be intense in the next few years.
11:48How does Mercedes plan to get on the road to recovery?
11:52The brand has begun deploying
11:53its proprietary software in its new cars,
11:56starting with the CLA,
11:58and it's got an aggressive product lineup ready.
12:03Pairing the biggest product launch offensive
12:06in the history of the company,
12:08where we launched the first of 40 models
12:11that are coming in the space of three years.
12:15It is about a comprehensive next-generation
12:18powertrain portfolio,
12:21needless to say on the electrical side,
12:24but also on the electrified high-tech combustion side.
12:29So, has the three-pointed star lost its sheen?
12:33The numbers point to a structural and cyclical reset.
12:37In Mercedes' glory days,
12:39engineering heritage and brand prestige
12:41could dictate price points.
12:43But there's been a paradigm shift in the auto industry.
12:48Whether Mercedes can survive these tumultuous times
12:51depends on how well it can transform
12:54without losing the brand identity
12:56that made it coveted in the first place.