Struggling earnings for Mercedes as profit nearly gets cut in half
Mercedes-Benz, the iconic German automaker, has unveiled a comprehensive cost-cutting program named "Next Level Performance" in February 2025. The program aims to bolster the company's long-term business by reducing expenses by five billion euros annually until 2027.
The program is designed to deliver operational efficiency, supply chain optimization, and strategic relocation of production facilities. By 2027, Mercedes-Benz aims to reduce production costs by 10%, and this figure is expected to increase to 20% by 2030.
A key part of the strategy involves shifting manufacturing from higher-cost regions like Germany to lower-cost areas such as Hungary, where production costs are around 70% lower. The company also plans to increase local-for-local production in China and the U.S. to reduce tariff exposure.
Supply chain rationalization is another essential component of the program. This includes supplier collaboration to standardize components and adopt modular design, driven by the BEAT26 initiative. Digital transformation is also a critical aspect, with investments in AI, digital twins, and automation to streamline R&D, production, and logistics.
As part of the cost-cutting measures, Mercedes is offering a severance program for employees who voluntarily leave their jobs. While the program involves deliberate workforce reductions, the company has assured that there will be no forced redundancies at Mercedes-Benz until 2030, due to an agreement with the works council.
The high US import tariffs on Mercedes-Benz products, currently at 27.5%, have been a significant factor in the automaker's financial struggles. The current tariffs are a rise from the initial 2.5% and have contributed to a 69% drop in profits in the second quarter of 2025. However, savings from the program have already been significant, contributing around €800 million in Q2 2025 alone and improving the return on sales by 300 basis points, which helped mitigate tariff-related margin erosion.
The company's rival, Audi, has also seen a drop in profits in the first half of 2025, with a decline of 37.5% compared to the previous year. The geopolitical and tariff challenges facing the automotive industry are severe, with lower-cost rivals in China and electric vehicle manufacturers posing significant threats.
Despite the challenges, Mercedes-Benz remains confident in the program’s long-term benefits, including improved profitability and resilience. The company is adapting to the new geopolitical realities and rising competitive pressure to ensure its continued success in the future.
- Mercedes-Benz's economic and social policy, dubbed "Next Level Performance," includes a strategic shift in finance by moving manufacturing to lower-cost areas like Hungary, aiming to reduce production costs, thus bolstering the long-term business.
- To cut costs and increase operational efficiency, Mercedes-Benz's business strategy involves digital transformation, including investments in AI, digital twins, and automation, and supply chain rationalization, such as supplier collaboration to standardize components and adopt modular design.
