Reality has overtaken the expectations and hopes of the Mercedes-Benz board and surged far ahead. It was in May 2022 on the Côte d’Azur that CEO Ola Källenius presented his luxury strategy to investors. Buoyed by the euphoria of then-impressive margins, and demand outstripping supply, Källenius announced the goal of increasing sales by around 5% annually until 2026. The adjusted operating margin in the passenger car segment was to reach around 14% from 2025 onwards.

This was not a wild dream of the CEO – in the first three months of 2022, the profit margin had impressed at 16.4%. In Källenius’ defence, the 14% target was set for favourable market conditions. However, Mercedes-Benz and the entire automotive industry are now as far from such a sunny scenario as a pedestrian is walking the distance from the Côte d’Azur to Stuttgart.

Now, like Volkswagen, Mercedes-Benz is making deep cuts to production capacity. Over the next three years, it is set to shrink by between one tenth and one fifth. At the same time, Källenius is reaffirming the goal of growth. That may sound like a contradiction, but the CEO is already looking ahead to 2027. From the then-reduced baseline, the company aims to move upward again.

Management is betting on the new models set to hit the market by then. The slower-than-expected ramp-up of electric mobility has consequences for the product lineup: about half of the roughly 20 new models will still be equipped with a combustion engine. Given customer preferences and Donald Trump’s policies, this is not a bad move – but for climate protection, it is a step backward.

For Mercedes-Benz’s profitability, this development is generally advantageous. Even if the company succeeds in narrowing the margin gap between electric and combustion-engine vehicles as planned, traditional powertrains remain ahead. Profitability could also benefit from the fact that most of the announced new models belong to the top-end category. Here, the S-Class, G-Class, Maybach, and AMG achieve the highest margins.

Källenius is sticking to his luxury strategy. Class over mass is the right approach. But even Mercedes-Benz needs a critical mass. Without a return to sales growth – especially in China – even the lowered profitability target will be difficult to achieve.