Volkswacht Bodensee - Mercedes CEO urges German 'productivity offensive' as China woes hit profit

The CEO of the luxury car maker vowed to streamline corporate operations -- and demanded the EU's top economy do the same to save its struggling industrial sector.

"We are firmly convinced that Germany needs a productivity offensive in the face of international competition, not least from China," Kaellenius told reporters on a call.

"We need to increase the competitiveness of Europe and especially Germany. We need to become better than we have been."

German carmakers have scrambled to bring overheads down as Chinese competitors have eaten up market share in their domestic market, cutting into their rivals' profits.

Volkswagen is weighing up to 100,000 job cuts across its 10 brands and BMW said last month it would prepare cost-cutting measures after weakness in China led to cuts in its profit forecast.

Thousands of Mercedes employees this month protested proposals to work more hours for the same pay and the carmaker last year set itself the target of shaving 10 percent off overheads by 2027.

Kaellenius said sacrifices would have to be made, pointing to what he said was an average cost gap of 70 percent between Mercedes' German and Hungarian operations.

"It would not be realistic to make Germany into eastern Europe, let alone China," he said.

"But we need to increase our competitiveness relative to where we are now."

- China write-off -

Reporting second-quarter profit that was boosted by savings so far, Mercedes said overall net income rose 13.5 percent to 1.09 billion euros ($1.24 billion), helped by its vans and financial services businesses.

Mercedes-Benz shares opened up 1.2 percent in Frankfurt before extending gains to be up 3.9 percent as of 0940 GMT.

But core earnings at the cars division -- the heart of Mercedes-Benz -- fell 26 percent to 909 million euros, hit by a weak economy and fierce competition in China.

The figure does not include a non-cash write-down of 704 million euros Mercedes booked in the value of its Chinese investments, indicating it sees lasting trouble ahead in the world's largest car market.

"These adjustments are not a function of change of strategy, they are just a function of the commercial environment," Mercedes finance boss Harald Wilhelm told investors and analysts on a call.

"Obviously it also demonstrates that there is a lower profit contribution expected from these ventures in China compared to the assumptions we took before."

Including the write-down, profit at Mercedes-Benz's car business plummeted almost 94 percent.

Mercedes-Benz's vehicle deliveries in China -- last year already at their lowest level since 2016 -- meanwhile fell a further 30 percent in the quarter, the company said.

Citing weakness in China, the carmaker said it now expected sales for the year to shrink up to 7.5 percent on the 2025 level of 132.2 billion euros, down from a previous forecast of roughly unchanged sales growth.

S.Spengler--VB