The misguided Luxury First and Electric Only policies, combined with external market conditions – shrinking profit margins and sales in China, plus U.S. import tariffs – have pushed Mercedes into a corner. Can Ola Källenius bring Mercedes back onto the path to success?
Between 2016 and 2018, Mercedes became the world’s number one premium brand. During Dieter Zetsche’s tenure, Mercedes had set the goal of becoming the leading premium brand by 2018. They achieved this two years earlier, becoming global No. 1 as early as 2016 – a crown they retained through 2018. What times those were!
In 2016, 2017, and 2018, Mercedes reached all-time sales records:
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2,083,888 units in 2016
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2,289,344 in 2017
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2,310,185 units in 2018
In 2018, the gap between Mercedes and BMW reached its highest level in modern times: nearly 185,000 more units than BMW.
And last year, sales dropped to an incredibly low level: only 1,800,800 units. Where did over 500,000 customers disappear? We will attempt to analyze this below. The 9% drop in sales compared to 2024, considering the external context, is not dramatic in itself. However, the halving of profit—from €10.4 billion to €5.33 billion—is a major alarm signal.
How did this happen? As usual, the causes are not singular but rather a combination of strategic and geopolitical factors. Let’s analyze them one by one.
The “Electric Only” Strategy
From a technical standpoint, dedicated electric platforms are the ideal solution for building a no-compromise EV. But Mercedes started down this path too early, in 2020. By comparison, BMW launched its Neue Klasse architecture only in 2025, five years later. Thus, between 2020 and 2025, by offering multiple types of powertrains on the same platform, BMW was better able to control and adjust volumes for each propulsion type.
Beyond starting too early, Mercedes launched its “Electric Only” strategy in the business and luxury classes with the EQE, EQS, and their derivatives—precisely the segments where it proved that customers with above-average financial means are not willing to pay for electric propulsion the same way they would for combustion engines.
As a result, the formula—low volumes, high prices, top technology—did not work. The top technology was present in terms of aerodynamics (record drag coefficient) and chassis systems (adaptive air suspension and rear-axle steering with up to 10 degrees steering angle), but not in charging performance, which is crucial for luxury EV customers. With lower charging power than the Kia EV9, the EQE and EQS fell short in a very important area.
Wealthy customers also did not particularly appreciate the aerodynamic design of what was meant to be the electric equivalent of the S-Class. Asian customers were dissatisfied with the narrow access to the rear seats. And customers around the world criticized materials that were inferior compared to the S-Class.
Thus began the decline, especially for the EQS, though the EQE has not been selling particularly well either. Mercedes was forced to offer huge discounts, which it tried to disguise as free option packages.
Even these discounts did not bring the expected jump in sales, although the planned volumes were never very high. Still, actual sales were even lower than initially projected.
Because the EVA2 platform was developed strictly as Electric Only, it did not allow for any synergies with other powertrain systems, and Mercedes now has no way to amortize the hundreds of millions of euros invested in this platform.
For this reason, Källenius made several radical decisions—there was no other solution. Mercedes abandoned the development of the MB.EA Large derivative of the MB.EA platform, which was supposed to underpin the next generations of the EQE and EQS. Instead, the EVA2 platform will be retained, upgraded from 400 to 800 volts, and will serve as the basis only for the successor to the EQS, which will look almost identical to an S-Class.
The MB.EA Medium platform, inaugurated with the new GLC EQ in autumn 2025 at the Munich Motor Show, will underpin the future C-Class EQ, E-Class EQ, and GLE EQ. The latter two models will replace the EQE and EQE SUV.
“Luxury First” Strategy
Another major mistake was focusing only on luxury models at the expense of the compact range. While BMW kept the 1 Series and 2 Series Active Tourer, Mercedes announced it would discontinue the A-Class and B-Class.
However, compact models play a major role in meeting fleet emission targets and achieving economies of scale, and the drop in sales had a negative impact. In 2025, Entry segment sales fell by another 10%, reaching 483,300 units compared to over 600,000 in 2018.
In addition, by discontinuing the A- and B-Class, Mercedes no longer had an entry-level model to attract a new generation of customers and no longer had any compact and spacious car for young families. When it realized the mistake, Mercedes announced it would keep the A-Class in production until 2028, and a few days ago came the news that a new generation A-Class will be launched in 2028. But this means a very long life cycle of over 10 years — far too long for a compact car — while its competitors have evolved significantly.
VAN.EA Platform
Another mistake in the “Electric Only” category: The new VAN.EA platform, intended to underpin all mid-size and large commercial vehicles starting in 2026, was initially planned as a purely electric architecture. This multi-billion-euro project is now facing market realities, as electric propulsion represents only 8% of this segment.
As a result, Mercedes has massively reassessed its strategy and is investing heavily in converting its global production lines, significantly affecting the profitability of the commercial vehicle division.
To prevent a failure like that of the EVA2 platform used for the EQE and EQS, Mercedes was forced to modify its strategy for the VAN.EA platform shortly before its launch. Although it was originally designed as a dedicated electric platform, Mercedes is now simultaneously developing an internal combustion engine variant (VAN.CA), which uses about 70% of the VAN.EA platform components and allows continued use of diesel engines. This change means a substantial increase in costs beyond the already enormous initial investment in the VAN.EA platform.
G-Class EQ and “Baby” G-Class
Another failure is the G-Class EQ. Although in 2025 G-Class sales reached a historic record of nearly 50,000 units, the G-Class EQ sold very poorly. More than half of total sales were represented by the AMG G 63.
Although Mercedes generally does not offer discounts on the G-Class and the G-Class EQ was not positioned very high in price — being much cheaper than the AMG G 63 — the G-Class EQ has struggled to find customers. As a result, Mercedes has been forced to offer discounts on the G-Class EQ.
In addition, Mercedes had planned for the future “baby” G-Class to be electric-only. Although it has not officially revealed many details, rumors suggest that a conventional powertrain is also being considered for the future compact G-Class.
Geopolitical Factors
External geopolitical factors have amplified Mercedes’ crisis. In addition to withdrawing from Russia, like other premium manufacturers, after the start of the war in Ukraine, two other major problems emerged.
Luxury model sales collapsed in China for two reasons: the persistent decline in consumer spending in the luxury segment and the aggressive price war initiated by new Chinese luxury brands led to a massive drop in Maybach and S-Class sales. China was once Mercedes’ largest market in the world and for this reason the massive decline in sales of luxury models creates a big negative impact.
Then, tariffs imposed by the Trump Administration contributed to further massive losses, which in 2025 alone amounted to over €1 billion. In 2026 they will be even higher, as 2026 is the first full year under the new tariffs. Mercedes produces only the GLE and GLS SUVs, as well as the EQE SUV and EQS SUV, in the United States, while the S-Class, E-Class, C-Class, and GLC are imported from Europe and are subject to tariffs.
Added to all this are rising energy costs in Europe, as well as additional costs for modernizing existing conventional platforms after Mercedes had stopped investing in them, prioritizing dedicated electric platforms that are not yet profitable.
Donald Trump’s recent decision to repeal Obama’s legislation on climate targets opens the door to a new era for the internal combustion engine in the USA. As a result, in the United States—where the electric vehicle market already accounts for only 15% of the total—it is likely to decline even further, and Mercedes needs competitive conventional models for this market.
