Profit crisis in German automotive: They are reducing row by row

Mercedes-Benz Group AG joined rivals Volkswagen AG and BMW AG in lowering its profit expectations after sales in China declined.

The luxury automaker said Tuesday that it now forecasts an adjusted return on sales rate of 2 percent to 3 percent for the year in its flagship auto division, having previously expected up to 5 percent.

Mercedes cited the increasingly difficult environment in China and higher costs resulting from partially rising material expenses in the fourth quarter as the reason for this decision.

The company said it expects group earnings before interest and tax to be almost flat compared to last year, downgrading its previous forecast of a significant increase.

Following the news, the company's shares lost up to 5.4 percent in value, recording the sharpest decline in more than a month. The stock has lost more than a third of its value this year.

This downward revision underscores how quickly China has transformed from a reliable profit engine for German automakers into one of their biggest strategic pain points. Falling profits are narrowing their room for maneuver at a time when they need to spend heavily to reposition their business models.

The cut in profit expectations will also intensify scrutiny and questioning of Mercedes CEO Ola Källenius' strategy to focus on higher-priced cars.

Mercedes is having to protect its brand in China while financing a busy product launch process and restructuring its Germany-based cost structure built for higher volumes.