THE GIST
Mercedes-Benz just delivered a brutal reminder that luxury does not insulate you from geopolitics. A $1.2 billion tariff hit helped drive a 57% collapse in annual operating profit, as China competition and currency headwinds compounded the pain.
WHAT HAPPENED
Mercedes-Benz Group reported full-year 2025 operating profit of €5.8 billion (about $6.9 billion), down 57% from the prior year and well below analyst expectations of around €6.6 billion. The company cited €1 billion, roughly $1.2 billion, in tariff costs, alongside weaker performance in China and adverse foreign exchange effects.
Group revenues came in at €132.2 billion, broadly flat year on year. Margins in the core cars division slipped to 5%, missing expectations of 5.4%. For 2026, Mercedes guided for an adjusted return on sales in its cars business of just 3% to 5%, signaling further pressure ahead.
Shares fell as much as 5% in early trading before trimming losses.
Management struck a defiant tone. Chief executive Ola Källenius said the group remained within guidance and emphasized efficiency, flexibility and cost discipline. The company plans further cost cuts in 2026 and outlined an aggressive product push, with around 40 new or refreshed models over the next three years, starting with an updated S-Class.
At the group level, Mercedes said it expects revenues in 2026 to remain roughly in line with 2025, while forecasting operating profit to be significantly above the depressed 2025 base. Free cash flow from the industrial business is expected to come in slightly below the €5.4 billion posted in 2025.
WHY IT MATTERS
Mercedes is discovering that premium positioning does not confer immunity in a multipolar trade war.
The $1.2 billion tariff hit is not a rounding error. It is a structural reminder that global supply chains built in the era of hyper-globalization are now political liabilities. U.S. auto tariffs, Chinese retaliation risks and a fragmented regulatory landscape are forcing European manufacturers into a permanent state of strategic recalibration.
For Mercedes, the problem is not just Washington. It is Beijing.
China remains the world’s largest car market and a key profit pool for German automakers. But domestic Chinese EV makers are engaged in an all-out price war, compressing margins across the industry. Mercedes car sales in China fell sharply last year, and management has warned that volumes could fall again in 2026.
That combination, tariffs in the West and deflationary competition in the East, squeezes the middle of the income statement. You lose pricing power in China and absorb cost shocks in the US. Meanwhile, fixed costs remain stubborn.