Bad news about the health of the Chinese economy continues to rattle global car companies, especially Germany’s biggest—VW, BMW, and Mercedes.
There’s a growing belief that China’s economy is slowing again due to the property crunch, which is now spreading across more sectors of the economy and impacting discretionary spending.
Luxury goods companies have been reporting a similar trend for months in China, and there are concerns that Apple’s new iPhone is also encountering buyer resistance there.
A shock earnings warning from Mercedes last week, along with news of a VW joint venture plant closure in China—following BMW’s surprise downgrade the week before—has further unsettled global business.
This news, combined with the challenges VW is facing in Germany, sets the stage for a close vote on Wednesday by the EU regarding the final level of tariffs on imports of EVs from China.
Germany is said to be opposed to the tariffs, but that probably won’t be enough to block the move. This will add further pressure to the struggling Chinese economy, where EVs and their exports are the only significant growth sector this year.
However, this growth isn’t benefiting foreign car companies. Japan’s Honda has already cut its conventional vehicle manufacturing capacity as it shifts focus towards hybrid production, and the three German giants, as well as the world’s largest automaker, Toyota, are also struggling.
What made the Mercedes warning more damaging to market confidence was its linking of earnings problems to the slump in Chinese economic activity and demand, along with a massive recall of over half a million luxury Mercedes models.
Mercedes’ profit issues emerged a week after BMW revealed problems with braking software in its 2024 models globally, and noted growing sluggishness in demand from Chinese buyers.
VW is also encountering increased buyer resistance in China, but its core problems lie in Germany and Europe, where sales are declining, profits are falling, and the company is preparing for a round of cost-cutting, factory closures, job cuts, and a confrontation with unions and governments next year that could impact the broader economy.
Mercedes shares dropped nearly 7% on Friday after its warning and are now down more than 13% year to date. BMW shares lost 2% on Friday and have now fallen by more than 27% year to date. VW shares also dropped over 2% on Friday, taking their year-to-date loss to 20%.
Shares in the Europe-US car giant Stellantis (Fiat, Chrysler, and Peugeot) fell 3.5% on Friday and are down 36% so far this year.
Mercedes said it now expects group earnings before interest and taxes (EBIT) to come in “significantly below” the previous year and that its adjusted return on sales would be between 7.5% and 8.5%, down from its earlier forecast of 10% to 11%.
The company stated that its downgrade was triggered by a “further deterioration of the macroeconomic environment,” primarily driven by weaker Chinese consumption and a prolonged downturn in the country’s real estate sector.
“This affected the overall sales volume in China, including sales in the Top-End segment. Overall, the sales mix in the second half of 2024 is expected to remain unchanged versus the first half, and therefore weaker than originally expected,” Mercedes added.
On Saturday, VW hinted strongly that it will close its joint venture car-making plant in Nanjing. The plant is part of the SAIC (formerly Shanghai Automotive Industry Corporation) VW joint venture, which said on Saturday that adjusting its production base was “normal and necessary.”
The comments appeared in a Chinese business media outlet after Reuters reported earlier in the week that Volkswagen plans to stop production at one of its internal combustion engine car plants in China, highlighting automakers’ struggles with overcapacity in the world’s largest car market.
Some reports indicated that the joint venture between VW and its Chinese partner SAIC Motor would close the Nanjing plant, though the firm has not yet decided whether to sell or shut down the facility.
Asked on Saturday about plans to close the Nanjing plant, SAIC Volkswagen stated that “based on corporate strategic planning and reaction to market trends, the company’s adjustment to its production base is a normal and necessary business behaviour,” according to the media report.