By Nigel Evans
President Donald Trump has famously wielded a big tariff stick to try and get OEMs to relocate manufacturing to the USA. And companies like Mercedes-Benz are starting to take these tariffs seriously as part of a broader response to toughening market conditions. Mercedes is well aware of movements in the market due to EV recalibration and weaker Chinese demand, and can point to its end-of-year results as evidence.
Due to such market conditions (which included the effects of Trump's 25% auto tariffs), Mercedes-Benz showed a 57% collapse in its group EBIT (earnings before interest and tax) readings last year. These figures slumped from €13.6 billion to €5.8 billion and, at the same time, company accountants confirmed more than a full percentage point off automotive operating margins.
Mercedes’ car division also delivered a 5% return on sales during 2025, which the company suspects would have been 6.1% had it not been for the effects of the tariff. So that trade policy is causing a drag on profitability in a business where even fractional margin shifts can have a big bearing on product planning and capital allocation.
In response to the turmoil, Mercedes will build closer to its customer base and will concentrate production in efficient hubs. It's looking to lower its costs to make it less susceptible to geopolitical shocks and will favor profitability over raw volume. The new Mercedes-Benz operating model will also represent a structural adaptation to what may well be sustained trade friction from now on.
US Production Expansion Directly Offsets Tariff Exposure
In the United States, a 25% Section 232 tariff raises the cost of German-built Mercedes models significantly if they are imported to what is one of the brand's largest markets. There are also tariffs around certain auto parts to complicate the picture and represent extra exposure for certain companies. Faced with these challenges, Mercedes could have decided to absorb those extra costs internally or raise prices.
However, putting up prices across the board could well have weakened demand in the top-level luxury segment, while it would have been tough for the company to absorb costs completely as this would compress margins further when global profitability was already under strain. Faced with those tougher choices, Mercedes-Benz opted for localization instead.
Mercedes has run its Tuscaloosa, Alabama plant since 1997. Here, it produces SUVs like the GLE 53 4Matic+ (which the company exports globally), and has an annual capacity of around 300,000 vehicles. Under the new tariff regime, Mercedes has decided to treat Tuscaloosa as a strategic hedge, rather than simply an SUV production center, and lower tariff exposure tied to inbound sales.
| 2026 Mercedes-AMG GLE 53 4Matic+ | |
|---|---|
| Engine | 3.0-liter turbocharged inline-six with compressor and mild hybrid support |
| Transmission | AMG Speedshift TCT 9-speed automatic |
| Drivetrain | AMG Performance 4Matic+ fully variable AWD |
| Power | 429 hp |
| Torque | 413 lb-ft |
At the same time, Mercedes will also reinforce its US economic footprint and this ought to support long-term market stability across the board. Still, the company won't abandon German production, but will opt to carefully recalibrate its mix instead. It'll still anchor some of its high-value and specialized vehicles in Europe, but where models have high sales numbers in the US, Mercedes will increasingly try and move their production closer to that market.
In doing so, it's not merely chasing logistical convenience but treating proximity as a form of financial protection.
Leaner Global Footprint Reduces Structural Vulnerability
It's all very well shifting manufacture through localization, but such a move in isolation could lead to global structural inefficiency. This means that the company needs to reshape its global production network, and Mercedes will put in place plans to consolidate as it moves towards a 2.2-million-unit throughput by 2028, as suggested in an investor presentation.
It's crucial to utilize assets as efficiently as possible in a very competitive market, and automotive manufacturing in general depends a lot on scale and utilization. You simply cannot have underused factories with high fixed costs, as this dilutes margins rapidly if you combine underutilization with tariffs. You’ll quickly arrive at a worst-case scenario, where unused capacity becomes particularly damaging.
With efficiencies in mind, Mercedes has decided to end vehicle assembly at the Compas joint venture plant in Aguascalientes, Mexico in 2026. At the same time, it will expand production in lower-cost European hubs like Hungary's Kecskemet plant, a location that's able to absorb additional volume more efficiently. Such restructuring can reduce reliance on marginal facilities and simplify trade flows.
And plants will increasingly serve regional markets instead of minimizing cross-border exposure. It's a very different approach to years gone by when Mercedes might tend to optimize its footprint for maximum global integration, but all of that is now changing. Mercedes will instead optimize regional resilience, thereby shortening supply chains, cutting down on complexity, and lowering geopolitical risk. This represents globalization in a world where friction is everywhere and where boardrooms need a careful planning approach.
Mercedes Has Shifted From Volume Ambition To Margin Discipline
A 57% EBIT collapse can certainly concentrate the mind and force a company like Mercedes to reconsider its strategic priorities. Part of that collapse may be down to movements in the Chinese market, where competitive intensity has increased sharply, and especially in lower luxury segments and among electric vehicles.
Domestic OEMs price very aggressively in China, and there are plenty of incentives floating around to try and shift inventory. Mercedes has seen a significant shrinkage in China, and it can no longer rely on output there to offset margin compression anywhere else. The Chinese complications arrive at the same time as tariffs begin to erode profitability in the US, and together, these pressures show how difficult it is to pursue aggressive global volume growth anymore.
Expect Mercedes to emphasize profitability over expansion in the short- to medium-term, looking closely at its return on sales rather than market share in isolation. Such a shift could well affect product strategy and there's no doubt Mercedes will look at capital deployment carefully even as it continues a gradual move towards electrification. It'll avoid oversupply in segments where demand appears to soften and may cut back on trim structures or option packaging to protect those margins.
Perhaps one of the biggest EOY shocks for Mercedes in 2025 came in the form of that lower return on sales figures. After all, a reduction from 6.1% to 5% shows just how vulnerable margins can be to external shocks. However, Mercedes is well aware that broader competitive realities are at play and disciplined profitability seems to be the order of the day for the company as the foundation for how it operates in the years ahead.
Sources: Mercedes-Benz, White House, Mercedes-Benz group.
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This article originally appeared on CarBuzz and is republished here with permission.
