Mercedes-Benz cuts its 2026 outlook as China weighs, while record electric sales lift Europe

Mercedes-Benz Group has lowered its profit outlook for 2026. On Tuesday 27 October the Stuttgart-based carmaker issued an ad hoc release saying its car division now expects an adjusted return on sales of 2% to 3% this year, down from 3% to 5%. Group EBIT is now expected at the prior-year level, rather than significantly above it.

On Wednesday 28 October the company published its full third-quarter figures. Group revenue fell to €30.7 billion from €32.1 billion a year earlier, and the car division's adjusted return on sales dropped to 2.5% from 4.8%. Chief executive Ola Källenius pointed to sales growth in Europe and the United States and to record sales of battery-electric cars, but said market conditions had become even more challenging, particularly in China.

The quarter in numbers

According to Mercedes-Benz's interim report, group EBIT was €1.77 billion in the third quarter, compared with €0.75 billion a year earlier. Net profit rose to €1.52 billion from €1.19 billion. On an adjusted basis, which removes one-off items, group EBIT fell 15% to €1.78 billion from €2.10 billion.

The pressure is concentrated in the car business. Mercedes-Benz Cars reported EBIT of €455 million and adjusted EBIT of €560 million, against €1,139 million a year earlier. That left the adjusted return on sales at 2.5%, and at 3.5% for the first nine months. Unit sales fell 8% to 407,232 cars, mainly because of lower volumes in China.

Other parts of the group held up better. Mercedes-Benz Vans grew unit sales 1% to 84,421 and earned an adjusted return on sales of 9.4%, with adjusted EBIT of €397 million. The financial services arm raised adjusted EBIT 42% to €445 million, and its return on equity improved to 13.8% from 9.6%.

Cash flow and costs

Industrial free cash flow was €172 million in the quarter, down from €1,367 million a year earlier, and €3.1 billion for the first nine months, against €5.6 billion. The company said this included about €1.1 billion of cash outflows for restructuring so far this year, as well as €1.0 billion from the sale of Daimler Truck shares. Net liquidity of the industrial business stood at €31.0 billion.

Mercedes-Benz said its fixed costs are now about 25% lower than in 2019. It plans to offer a voluntary severance programme in Germany again from December 2026. In the first nine months it spent €6.4 billion on research and development and €2.9 billion on capital expenditure, and returned €5.2 billion to shareholders.

Electric cars and Europe

The positive side of the report is in Europe and in electric cars. Sales rose 5% in Europe, 13% in Germany and 6% in the United States. Sales of battery-electric cars reached a record, up 61% year on year and 29% on the previous quarter, and took a 16.8% share of car sales. Including plug-in hybrids, electrified cars made up 25% of sales. In Europe, almost one in two cars sold was electrified, and one in three was fully electric.

The company said order books for its new models reach into 2027. "Continued sales growth in Europe and the United States and record BEV sales show that our new models are resonating with customers," Källenius said in the report. He added that market conditions had become "even more challenging over the course of the year, particularly in China".

Software and AI

Mercedes-Benz also used the report to underline its software plans. Its own operating system, MB.OS, is now used in all new models. The company has expanded its partnership with NVIDIA on the next generation of driver assistance and automated driving, and plans to launch point-to-point assisted driving in the first German cities by the end of 2026. An AI tool for product development, PLM.AI, is meant to cut development times by up to 30%.

The new outlook

In the ad hoc release, Mercedes-Benz now expects industrial free cash flow to be significantly below the previous year. The outlook for Vans, an adjusted return on sales of 8% to 10%, and for financial services, a return on equity of 12% to 14%, was unchanged.

Handelsblatt reported that the shares fell more than 5% at times on Tuesday, making Mercedes-Benz the biggest loser in the DAX. The paper noted that group EBIT was €5.8 billion in 2025, and that "prior-year level" in Mercedes-Benz's terms means within a range of plus or minus 5%. AFP reported that Mercedes-Benz is the third major German carmaker to cut its outlook, after BMW and Volkswagen, and that its deliveries in China fell 29% in the first nine months. Ingo Speich of Deka Investment told AFP: "Structural challenges show no sign of abating."

What it means for European founders and investors

Mercedes-Benz is one of the largest employers and buyers in southern Germany, with a supplier network that reaches thousands of smaller companies. When the car division earns only 2.5 cents of adjusted operating profit per euro of revenue and keeps cutting fixed costs, suppliers and service providers feel it through tougher price talks and slower decisions.

At the same time, the report shows where the money is still going. Electric cars are growing fast in Europe, and the company is spending on its operating system, automated driving and AI in development. For startups in automotive software, battery technology, charging and industrial AI, that is where carmakers still have budgets, even in a weak year. The shift away from China as a growth market also makes Europe and the US more important for the whole industry.

For investors, the message is that the problems of German carmakers are not only cyclical. Weak demand in China, tariffs and price pressure are hitting margins at the same time as large investments in software are due. That fits the wider picture of a slow German economy described in the government's autumn projection and the latest ifo business climate. More European business news is on our Europe page.

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