With the Chinese market losing momentum, Mercedes-Benz relies on financial services to sustain profits

The rebound in profits for Mercedes-Benz in the second quarter failed to mask the slowdown in the Chinese market.

On July 28, Mercedes-Benz Group released its 2026 Q2 earnings report. The group achieved operating revenue of 32.061 billion euros for the quarter, a year-on-year decrease of 3.3%; net profit was 1.086 billion euros, up 13.5% YoY; and adjusted EBIT was 2.299 billion euros, an increase of about 16% compared to the previous year.

In the first half of the year, Mercedes-Benz Group achieved an operating revenue of 63.663 billion euros, a decrease of 4% YoY; net profit was 2.519 billion euros, down 6% from the previous year.

Due to continued downward pressure in the Chinese market, the company simultaneously lowered its full-year 2026 guidance. Mercedes-Benz's passenger car sales and group revenue, both previously expected to be flat from last year, are now forecasted to be slightly below last year’s levels.

What truly altered the annual outlook was the Chinese market.

In the second quarter, Mercedes-Benz's global passenger vehicle sales reached 417,765 units, a year-on-year decrease of 7.9%. Among them, sales in the Chinese market were only 98,624 units, a 30% year-on-year drop, making it the region with the largest decline among major Mercedes markets.

In the first half of the year, Mercedes delivered a total of 210,200 vehicles in China, down 28% year-on-year.

In contrast to China’s decline, sales in the European market grew by 5% year-on-year in the first half, while the North American market grew by 15%. China's share of global Mercedes sales has fallen from 31% in 2025 to 21%.

The revenue dimension reflects the same trend.

In the first half of the year, Mercedes’ revenue in China was 7.01 billion euros, down 19.1% YoY, far exceeding the group’s overall 4% revenue decline. Mercedes attributed the drop to intensified price competition in the Chinese market, as well as the fact that the brand is at a crucial stage of transitioning between old and new models, with several main models in capacity ramp-up and production line switchover periods.

The phenomenon of declining sales but increasing net profit is explained by multiple factors. The profit growth mainly stems from refined cost management and continued optimization of the product mix.

The financial report shows that Mercedes is continuously implementing efficiency enhancement measures, reducing R&D and certain operating costs, which has alleviated profit pressure to some extent.

In addition, the light commercial vehicles and financial services businesses performed relatively steadily, partially offsetting the impact of declining profitability in the passenger car segment. Adjusted EBIT for the financial services business was 492 million euros, a year-on-year increase of 70%. At the group level, there was also a 131 million euro gain related to the sale of the Athlon leasing subsidiary.

However, the automotive business itself is still under significant pressure.

In the first half of the year, Mercedes-Benz passenger cars achieved operating revenue of 45.945 billion euros, down 5% YoY; the adjusted sales profit margin dropped from 6.2% a year ago to 4%. Adjusted EBIT for the passenger car segment was 909 million euros, a decrease of 26% year-on-year. Notably, the passenger car business also recorded a 704 million euro impairment loss related to equity investments in China.

Adjusted free cash flow for industrial operations was 1.276 billion euros in the first half, down 35% year-on-year, indicating the impact of declining sales volumes on the ability to generate operating cash is beginning to show.

Electric vehicles are one of Mercedes’ few bright spots.

In the second quarter, global deliveries of all-electric models reached about 63,000 units, up 50% year-on-year. In the first half of the year, sales of all-electric vehicles reached 103,000 units, up 45% YoY. As a result, Mercedes raised its full-year expectation for electrified vehicle sales mix from 21%-23% to 23%-25%.

However, this growth was mainly concentrated in European and North American markets, and sales of all-electric models in China have yet to show clear improvement. In Europe, sales of all-electric vehicles reached 43,500 units, up 87% year-on-year.

Meanwhile, Mercedes’ sales of plug-in hybrid models in the first half of the year were 58,600 units, down 34% year-on-year, mainly due to the discontinuation of some models in China and the cancellation of tax incentives in the US.

Facing continued pressure in the Chinese market, Mercedes has already launched multi-faceted response measures. The company is implementing its largest product launch plan in history, planning to roll out more than 40 new models between 2025 and 2027. In the Chinese market, Mercedes plans to release 7 exclusive models by 2027, including key electric products such as GLC, C-Class and E-Class based on the brand-new MB.EA all-electric architecture.

Organizationally, adjustments are also underway. Previously, Beijing Mercedes-Benz Sales Service Company planned two rounds of staff optimization to reduce the workforce from about 900 to under 600. The R&D system is expected to see a headcount reduction of about 10%, affecting around 2,000 R&D personnel in Beijing and Shanghai.

Mercedes CEO Ola Källenius stated in the earnings report that despite the challenging market environment, the company maintained its growth momentum in the second quarter and will continue to push forward with product launches. However, the company’s downgrade of full-year revenue expectations indicates that management anticipates continued headwinds in the Chinese market through year-end.

For Mercedes, how to stabilize the core business of fuel vehicles while accelerating the electrification transition, and how to find a new balance between sales and profitability, will be key to whether the company can turn around its fortunes in the Chinese market.