Mercedes-Benz Group AG expects returns to decline this year. Here's why

Mercedes-Benz Group AG expects returns to decline this year as the luxury-car maker contends with a slowing economy and cooling demand for electric vehicles.

The manufacturer is forecasting an automaking margin of as low as 10%, down from 12.6% last year, and pared back its EV sales expectations. Mercedes still announced a €3 billion ($3.2 billion) share buyback program after reporting better-than-expected cash flow.

The German company’s plan to sell more top-end cars like the S-Class to bolster profits and fund the costly transition to battery technology is running into first roadblocks. In October, the manufacturer cautioned that margins were falling on higher costs and lower average vehicle prices.

ALSO READ: Mercedes sees strong cash flow following focus on top models

“The economic situation and automotive markets continue to be characterized by an exceptional degree of uncertainty,” Mercedes said Thursday. “Further supply chain disruptions and in particular, availability bottlenecks for critical components, remain a significant risk factor.”

ALSO READ: Mercedes-Benz sets eyes on smaller cities to fuel further growth

Like its peers, the carmaker long benefited from pent-up demand that helped offset some of the economic headwinds. But orders are expected to normalize this year as high living and borrowing costs weigh on consumption. The German company also needs to deal with waning enthusiasm for EVs and pressure from Tesla Inc.’s frequent price cuts.

The share of fully electric and plug-in hybrid vehicles will remain roughly stuck at between 19% and 21% of its sales this year, Mercedes said Thursday. The manufacturer also pared back its medium-term outlook for the technology, and now expects EVs to account for 50% of sales in the second half of the decade rather than in 2025.