Mercedes CEO’s luxury crown bet

SURROUNDED by more than a century of automotive history at the Mercedes-Benz museum in Stuttgart, tennis legend Roger Federer edged a jet black S-Class sedan on to the stage amid flashing cameras and pulsating music, lending star power to the German carmaker’s latest attempt to defend its luxury crown.

Alongside Federer’s appearance, the unveiling featured a cameo by Nvidia Corp’s Jensen Huang.

The head of the world’s most valuable company added Silicon Valley cachet via a video link projected above a full orchestra.

Such theatrics are unusual for a modest facelift and underscore how much is riding on this moment for Mercedes-Benz Group AG.

The stakes are high because the S-Class sits at the centre of chief executive officer (CEO) Ola Kallenius’s luxury-first strategy.

Intended to lift returns, help fund the complex shift to electric vehicles (EVs) and insulate Mercedes from its heavy fixed costs, the bet looks increasingly shaky.

Since the strategy’s introduction in 2022 – in the aftermath of the Covid pandemic when car prices rose sharply and volumes tumbled – demand has cooled further and competition has intensified.

Internally, labour unions have grown restive as production slips, creating headwinds for potential cost-cutting.

The combination leaves little room for more missteps.

“It’s a last shot” for Kallenius, says Ingo Speich, head of corporate governance for Deka Investment in Frankfurt, one of Mercedes’ largest German shareholders.

While the CEO still has the support of the board for now, “he has to bring proof that the strategy works in the right way.”

The 56-year-old CEO vowed to stay the course, but cautioned that 2026 will be a ramp-up year as the carmaker rolls out a range of new models.

Despite concerns, he noted that luxury vehicles now account for 15% of the sales mix, compared to 11% previously.

“As the world’s leading top-end manufacturer, this is our home turf,” he said in response to a question from Bloomberg. “This is where our greatest earnings potential lies.”

The S-Class, which starts at around €121,000 (US$144,000), is critical to any revival.

The model anchors Mercedes’s portfolio, setting the standards for tech and prestige. But sales have dropped in the United States and Asia.

Weakness in China, the brand’s biggest market, is particularly alarming because it stems in part from local rivals winning over discerning customers with comfort and refinement – features that were once a Mercedes trademark.

The German brand’s early high-end electric models such as the EQS sedan and a battery-powered version of the elite G-Class off-roader failed to generate the hoped-for momentum.

Those stumbles put more pressure on the S-Class to carry the load. 

The strain is evident in Mercedes’s results. Since 2022, profit margins on carmaking have narrowed to around 4% from almost 15%.

Operating profit for 2025 is forecast to more than half, according to analyst estimates compiled by Bloomberg – far outpacing a 9% decline in global deliveries. 

Reducing offerings of lower-end models and pushing prices higher has left factories running below capacity.

Flagging demand for the S-Class has prompted management to reduce production at the Sindelfingen plant near Mercedes’s Stuttgart headquarters to one shift – from a maximum of three – since October 2024.

The model’s struggles in China caught the company off guard.

As recently as 2023, Mercedes executives remained bullish about the S-Class’s prospects there, arguing that it was better insulated from the EV trend than more modest segments. 

Since then, demand for high-end imported sedans has softened amid China’s property slump and trade tensions with the United States, a development that also hit BMW AG, Volkswagen AG’s Audi and Porsche AG. 

Technology shifts have had a bigger-than-expected impact.

Electric motors nullify the refinement edge Mercedes spent decades honing in its high-end combustion engines, and Chinese manufacturers have been more adept at integrating tech-powered amenities to appeal to chauffeured owners.

More recently, the S-Class became the first production car from any automaker certified to offer Level 3 automated driving, allowing hands-free operation on certain stretches of Germany’s Autobahn. 

The vehicle’s decline is emblematic of automotive power shifting from Germany to China, where local manufacturers lead on software and control much of the EV supply chain.

German automakers and major suppliers including Robert Bosch GmbH are increasingly relocating development work to the Asian country, attracted by lower engineering costs and a faster pace – a dynamic the industry refers to as “China speed”.

The challenge extends beyond Asia.

In Europe, Mercedes is facing intensifying competition as tighter emissions rules and weaker overall demand prompt BMW, Volvo Car AB and other premium brands to similarly target the high-end segment in pursuit of returns. 

Although Kallenius targeted quality over quantity, sharp declines in China and softer demand for mid-sized models such as the E-Class undercut the central promise of his strategy.

Room to manoeuvre has since become more difficult as pressure to innovate intensifies, just as US President Donald Trump’s tariffs increase costs. 

Supporters say the chief executive has shown flexibility in recalibrating his luxury push, including a pledge to develop a successor to the A-Class compact, which was previously slated for cancellation.

Mercedes is also weighing lower-cost variants across its lineup, according to people familiar with the company’s plans.

There are tentative signs that the strategy may regain momentum.

The new CLA electric sedan was named European Car of the Year at the Brussels International Motor Show in January.

Order books for both the CLA and the upcoming GLC EV are filled through the second half of 2026, according to Mercedes.

The S-Class, though, remains pivotal.

At the unveiling last week, Mercedes emphasised upgrades aimed squarely at software and rear-seat comfort, including voice controls powered by artificial-intelligence tools from OpenAI, Microsoft and Google.

Rear passengers get twin 13.1-inch screens for videoconferencing, along with controls for everything from window blinds to massage seats.

Set against the grand halls of the Mercedes museum, the refreshed S-Class was intentionally positioned alongside the limousines and sports cars that built the three-pointed star into a global luxury icon. 

The tougher test will play out far from Stuttgart. In dealerships and online consumer forums in China, Mercedes will need to show the updated sedan is not merely a future museum piece, but a credible contender in today’s luxury market.

 “What we’re doing here for a so-called refresh is actually a revolution,” Kallenius said at the event. — Bloomberg