Mercedes-Benz reported Q2 operating profit up 22% to €1.5 billion on Tuesday, but the company wrote off over €700 million due to “intense competition and subdued consumer sentiment” in China. Group earnings before interest and tax came in at €1.7 billion, slightly below analyst consensus of €1.6 billion.

The mixed results masked a deeper problem: Mercedes’ core cars division is under siege in its second-largest market. Quarterly sales in China plunged 30% year-over-year. The company also cut its full-year outlook for both car sales and group revenue.

China’s Luxury Car War

Chinese automakers have flooded the luxury EV segment with cheaper models that match or exceed European quality. BYD, Li Auto, and other local players are eating into Mercedes’ market share. Mercedes can’t compete on price without destroying its brand positioning, so it’s losing volume instead.

The €700 million write-off reflects just how serious the damage is. The car division’s earnings fell 26% to €909 million. That’s not a blip—that’s structural margin compression from a price war Mercedes is losing.

Some Bright Spots

Mercedes’ financial services and vans units posted strong earnings, partially offsetting weakness in cars. Net profit rose 13.5% to €1.09 billion from €957 million in the year-ago quarter. But investors saw through the aggregate number: the core business is struggling.

Cost-cutting helped—the company is slimming operations and squeezing suppliers. But cost-cutting only works until it doesn’t. If Mercedes keeps losing market share in China, even disciplined cost management can’t save the car division.

What’s Next

Mercedes now expects car sales and group revenue to come in “slightly below the prior-year level” in 2026. That’s code for headwinds ahead. The company is bracing for further weakness in China and betting that cost discipline and its premium positioning will sustain margins.

The real story: European luxury automakers are caught between Chinese price competition and the need to maintain premium positioning. That’s a widening gap, and Mercedes is starting to feel the squeeze.