(Oct 27): Mercedes-Benz Group AG cut its profit guidance, joining peers Volkswagen AG and BMW AG after sales in China declined.

The luxury-car maker now sees an adjusted return on sales in its core cars division of between 2% and 3% for the year, it said Tuesday (Oct 27), compared with as high as 5% previously.

Mercedes cited the increasingly tough environment in China as well as higher costs during the fourth quarter, partly driven by higher expenses on materials. The company now expects group earnings before interest and tax to be roughly flat from a year earlier, downgrading its previous forecast for a significant increase.

The shares declined as much as 5.4% following the news, the steepest drop in just over a month. The stock is down by more than a third this year.

The downgrade underscores how quickly China has gone from a dependable profit engine for German automakers to one of their biggest strategic headaches. Falling earnings are leaving them with less room to manoeuvre, just as they need to spend heavily to reposition their businesses.

The cut will also intensify scrutiny of CEO Ola Källenius’s strategy of concentrating on higher-priced cars. Mercedes now has to protect the brand in China while financing a heavy product rollout and restructuring a German cost base built for stronger volumes.

Uploaded by Arion Yeow