The 2025 financial statements reflect the scale of the decline: net profit has halved to €5.1bn, automotive margins have collapsed to 5% compared to 12.6% in 2023, with its 2026 guidance capped at 3%-5%—the same level as Volkswagen, which sells its cars at a lot less. To understand how the star lost its shine, we need to look back to May 2019.

A winning strategy... in the short term

That month, Ola Källenius took the helm of the group. The Swede rose through the ranks via Mercedes F1 engines and then AMG. His vision: Mercedes should no longer chase volumes but rather target the ultra-high-end segment. Fewer cars, higher prices and insolent margins. In 2022, the gamble seemed to pay off. Automotive profitability neared 15%, a record high. The star was shining bright. Then China faltered.

A rude awakening

Last December, in the local rankings of luxury sedan sales, the S-Class did not even appear in the top 4. Ahead of it sat a newcomer: Huawei's Maextro, launched in May. By November, it was already outselling the combined volumes of the BMW 7 Series and the Porsche Panamera.

Over the year, Chinese deliveries sluped 19%. While the entire German premium segment is suffering (BMW -12.5%, Audi -5%), Mercedes is paying the heaviest price. BYD, Li Auto, and Huawei offer technology on par with the Germans for significantly less. Källenius concedes: the price gap must narrow, and therefore, so must margins.

Hardly had this shock been absorbed when a second front opened in the West. US customs duties of 15% are set to cost Mercedes nearly a billion in 2025. While SUVs are produced in Alabama, the S-Class, E-Class, and AMG models still roll out of German factories. The most profitable models are the most heavily taxed, and the bill is set to swell in 2026.

Doubling down

Cornered, Källenius is accelerating. A new S-Class was unveiled in January—internal combustion but equipped with a proprietary central computer aimed at autonomous driving. The "Next Level Performance" plan involves 40 models over 3 years, with a third in the most luxurious segment by 2027. The bet is perplexing: the move upmarket has itself reduced the target customer base just as competition was broadening. Mercedes is betting that the remedy is the very thing that fueled the ailment.

The market's verdict

Yet, the stock market is hesitant to punish the stock further. At 9x 2026 earnings, Mercedes is not the cheapest of the trio (BMW 8x, Volkswagen 4.5x), but the enterprise value drops to 1.5x EBITDA once the €32bn in cash is deducted. Out of a €49bn market capitalization, €32bn is already sitting in the coffers: the industrial business is valued at just €17bn. With a 6.2% dividend, you are being paid to wait. It remains to be seen whether Stuttgart or Shenzhen will better anticipate what the wealthy Chinese of tomorrow truly want.