Mercedes-Benz: 4-6% margin for cars - $418 Million Tariff Hit

Mercedes-Benz has revised its profit margin forecast for its car division to a range of 4% to 6% for 2025, incorporating the impact of nearly $420 million in tariffs linked to the ongoing trade tensions between the United States and the European Union. This revised guidance marks the company’s first detailed financial projection since the U.S. administration imposed new trade measures. The updated margin reflects a significant recalibration from earlier expectations and signals the toll of global trade dynamics on Germany’s premium automaker.

From Cautious Optimism to Strategic Retrenchment

Earlier this year, the automaker had indicated a more optimistic margin forecast of 6% to 8% for its car division, issued in February before tariff impacts were fully understood. However, that projection was retracted in April as the full scope of trade barriers and operational headwinds became clearer. The earlier guidance also followed a challenging 2024 when overall group earnings dropped 30% and the core car business faced a steep 40% decline. By mid-2025, it became clear that maintaining even the lower end of the original forecast would be difficult without substantial cost discipline and margin recalibration.

Trade Agreement Eases Tensions but Tariff Burden Remains

The revised margin outlook came shortly after the U.S. and the EU reached a partial trade agreement, narrowly avoiding a deeper conflict that could have severely disrupted transatlantic commerce. The deal, finalized on Sunday, included a 15% tariff on most EU goods, significantly lower than the initially proposed 30%, and helped ease concerns about a potential full-blown trade war between the two major economies. In parallel, the EU committed to reducing non-tariff barriers, particularly on automotive imports, which provided partial relief to European carmakers like Mercedes-Benz.

Tariff Hit Softened But Still Significant

While the trade pact brought some breathing room, Mercedes-Benz still faces a substantial financial impact from the tariffs. The company has now halved its estimated margin erosion from tariffs to approximately 150 basis points. This adjustment translates into a direct hit of €362 million (roughly $418 million) to the adjusted earnings before interest and tax (EBIT) of its car division. Without the tariffs, the car unit’s profitability would have hovered near the lower end of the previously stated 6% to 8% range, highlighting how external trade policies continue to distort its business fundamentals.

Political Backing for Trade Stability

German Chancellor Friedrich Merz hailed the trade deal as a timely intervention, describing it as crucial in shielding Germany’s export-driven economy from further strain. The automotive sector, a central pillar of German manufacturing and employment, stood to lose heavily in the event of prolonged trade disruptions. The agreement not only helped stabilize bilateral relations but also preserved a relatively favorable landscape for key players like Mercedes, whose export exposure to the U.S. remains higher than its European peers.

Mercedes Among Top Beneficiaries of the EU-U.S. Pact

Analysts at Morningstar identified Mercedes-Benz as one of the main beneficiaries of the U.S.-EU trade understanding, due in part to the company’s import profile. Unlike rivals that rely more heavily on Mexico or Canada for North American supply, Mercedes has historically shipped a higher volume of vehicles directly from Europe to the U.S. Additionally, the company’s domestic manufacturing footprint in Tuscaloosa, Alabama, continues to offer a partial buffer against foreign trade penalties, allowing it to meet U.S. demand while mitigating some of the tariff exposure.

Q2 Financial Performance Underlines Operational Strain

The second-quarter financial results reflected the intensifying pressure on Mercedes-Benz’s bottom line. Adjusted operating income dropped by more than half to €1.99 billion ($2.30 billion), while reported EBIT plunged further to €1.27 billion after factoring in not just tariffs but also broader restructuring and one-time charges. These included a €750 million impact from the sale of a plant and business reorganization in Argentina. The overall figures underscore how external shocks and internal strategic shifts are converging to redefine the company’s financial architecture.

Revenue Slump Highlights Broader Demand Challenges

Mercedes-Benz’s total revenue for the second quarter fell 9% to €33.15 billion. This decline was driven not only by tariff-induced pricing pressures but also by a contraction in global demand—particularly in its car and van segments. Lower shipment volumes, especially in key regions, compounded the margin squeeze and forced the company to revise its full-year expectations. It now forecasts total group revenues for 2025 to be "significantly below" 2024 levels, reinforcing the sobering outlook for the months ahead.

Chinese Market Continues to Weigh Heavily on Outlook

Adding to Mercedes-Benz’s difficulties is the sustained slowdown in China, one of its most critical markets. The company reported a 10% drop in vehicle deliveries in the first quarter of 2025, followed by a steeper 19% fall in the second quarter. These back-to-back contractions point to persistent demand headwinds in the world’s largest auto market, where shifting consumer behavior, domestic competition, and geopolitical unease have all taken a toll. The performance in China not only drags down unit volumes but also affects the overall profitability mix, given the region’s historical contribution to luxury sales.

Looking Ahead: Balancing Uncertainty with Caution

Mercedes-Benz’s updated projections and cautious tone reveal the reality of operating within a complex and rapidly evolving global trade and demand environment. While the U.S.-EU agreement has prevented an immediate escalation, lingering risks remain, from shifting consumer preferences in Asia to ongoing cost pressures in Europe. The company’s ability to maintain resilience will likely depend on strategic operational efficiency, careful portfolio management, and agile navigation of international policy landscapes.