Porsche and Mercedes plan cost cuts amid weak demand and profit decline in China

Porsche AG and Mercedes-Benz Group AG are planning cost reductions after fierce competition and weaker demand for their luxury cars in China hit profits.

Porsche is reviewing its model lineup after sales and earnings fell in the first nine months of the year. Earlier on Friday, Mercedes reported its lowest automaking margin in nearly three years after selling fewer expensive models like the S-Class limousine.

The German brands are struggling in the world’s biggest auto market, where local manufacturers led by BYD Co. are taking over. They’re also contending with weak demand for electric vehicles in Europe after several countries reduced subsidies. The issues have caused a wave of profit warnings recently from automakers including BMW AG and Porsche’s parent Volkswagen AG.

Mercedes’ key gauge of profitability slid to 4.7 per cent in the third quarter, undershooting its minimum target of eight per cent and the lowest level since the carmaker split from its truck business in late 2021. Porsche’s third-quarter vehicle deliveries in China slumped to their lowest level in a decade.

“The Q3 results do not meet our ambitions," Mercedes Chief Financial Officer Harald Wilhelm said Friday. “We are taking a prudent view about market evolution going forward and we will step up all efforts on further efficiency increases and cost improvements across the business."

Mercedes’ shares declined one per cent in Frankfurt. The stock is down about eight per cent this year. Porsche reported after the market closed.

Porsche said it’s sticking to its full-year guidance, betting that demand will recover in the final few months of the year. The company had lowered its outlook in July, saying it expected to achieve a return on sales of as high as 15 per cent.

The results contrasted sharply with Tesla Inc., which saw its shares surge the most in 11 years after the company posted surprisingly strong earnings and profit margins. The US manufacturer projected increased deliveries in the final quarter, while Mercedes said its sales would remain at a similar level.

China’s economic slowdown has hit the German automakers hard, with reduced luxury spending weighing on orders of Porsches and Mercedes’ high-end S-Class and Maybach models. The downturn in China had already forced Mercedes to cut its 2024 sales outlook and lower adjusted profit margins for its cars unit.

Porsche plans to slim down its dealer network in China to cut costs, Chief Financial Officer Lutz Meschke told reporters on a call. The company’s also aiming to trim research and development costs, he said. Mercedes didn’t elaborate on where its cuts would fall.

Suggested watch: New-gen Mercedes-Benz E-Class LWB launched in India at ₹78.5 lakh

Both companies operate plants in Germany, where labour and energy costs are relatively high. They’re also investing heavily in the electrification shift, all while producing both electric and combustion engine models like the Porsche 911 sports car.

Mercedes’ carmaking profitability figure is likely the lowest since the second quarter of 2020, when sales and production were hit by disruptions during the early stages of the coronavirus pandemic. The company didn’t publish figures for just its carmaking margin until its split from Daimler Truck, instead providing a combined figure for cars and vans.

Chinese manufacturers are dominating in EVs there because of their lower cost of production, Porsche’s Meschke said. While the CFO said the third quarter was the weakest of 2024, he warned that sales in China will remain depressed next year.

Get insights into Upcoming Cars In India, Electric Vehicles, Upcoming Bikes in India and cutting-edge technology transforming the automotive landscape.