Mercedes-Benz is abandoning the production model that served it in China for two decades in favour of a “100% China for China” strategy, starting with the new electric E-Class in the second half of 2027. In the same breath, Chief Executive Ola Källenius told a Berlin audience that German production costs must fall to US levels; the two announcements are better understood as halves of a single decision than as separate initiatives.
Under the old approach, Mercedes split production of each car between regional sites before completing final assembly in China for local buyers, a system Källenius said no longer works. “We, and anyone else who wants to be a global player, will have to adapt the entire business system, because a competitive fight is taking place in China among more than 100 brands,” he said. Mercedes sales in China fell 31% in the third quarter amid weaker luxury demand and stronger local rivals, and Källenius described the present Chinese consumer mindset as “very, very cautious”.
Källenius’ defence of staying in China, albeit on a wholly-localised basis, sits awkwardly against Mercedes-Benz’ continued reliance on globalised supply chains. “The auto industry is perhaps the most interconnected in the world,” he acknowledged. “It would be completely illusory to think you can break that apart so we have to cooperate intelligently.” Yet full localisation breaks apart the cross-border chain that once linked the automaker’s Chinese assembly to its European component base. Interconnection now means Chinese suppliers and software partners such as Momenta, Tencent and ByteDance working inside the company, rather than German parts flowing to Beijing.
That strategic shift will offer little comfort to German suppliers, most of which have already embarked on deep cost-cutting campaigns and layoffs. But the problem in Germany, Källenius emphasised, is one of cost: on a cost index where Germany sits at 100, the US stands at around 80. Mercedes must bring its domestic costs down at least to parity with the US, and management is pressing staff to work longer hours without extra pay.
The automaker has stated on the record that further savings could equal the cost of closing two plants, although it stressed the comparison was purely illustrative and no sites have been identified. “We can’t hide anymore,” Källenius said. “If we’re not ready to take a significant leap then we’ll have clearly less industrial activity in this country in ten years time.” It is hard to treat such examples as entirely illustrative when German counterparts like Volkswagen are literally in the midst of such closures, citing virtually identical cost pressures as the reason.
While China remains weak, Mercedes’ growth appears to be shifting elsewhere. Källenius has said US sales could rise from more than 300,000 vehicles a year towards 400,000, backed by further investment, and he has pointed to lower-cost plants in Hungary, Romania and Poland to strengthen margins. Audi’s US$4bn commitment to a new US assembly plant shows the same logic at work across the German industry, with each major market increasingly served from within.
The pressure on margins leaves little room for patience: the automaker cut its full-year outlook last month, now expecting an adjusted margin of just 2-3% for its cars division, down from 3-5%, and it will relaunch a voluntary severance programme for indirect staff in Germany from December. The previous round cost about €1.8bn (US$2bn) in provisions during 2025, and the earnings impact of the new one will mostly fall in 2027, the same year the China-built E-Class arrives.
The E-Class will ultimately show whether full localisation changes Mercedes’ fortunes in China where earlier local tailoring did not. Chief Financial Officer Harald Wilhelm said future China-built vehicles would move close to full local sourcing to cut costs, and Mercedes intends to rely less on Chinese profit pools overall. Lower costs, however, only help if they reach the price tag, and Källenius has ruled out chasing market share at any cost in a market where domestic rivals compete precisely on price.
The CLA L shows why that distinction matters: the automaker’s China-exclusive long-wheelbase electric saloon offered up to 866 km of CLTC range, yet it sold just 627 units in the first half of 2026 before production at its Beijing joint venture was reportedly paused. It was effectively a car tailored at least in part to local tastes, but not to local prices. The E-Class localises the cost base rather than just the wheelbase, which is a more credible answer to the problem—provided the savings reach buyers rather than being banked as margin.
Mercedes is effectively replacing one global production system with three regional ones: China for China, the US for the US, and Eastern Europe for much of Europe. Germany’s place in that map is no longer guaranteed by heritage, and Källenius’ cost index is a plain statement that domestic plants must now compete for work on the same terms as any other.
