Mercedes-Benz Group AG sees car-making margins at the low end of its forecast this year due to rising costs and a weaker global economic environment.

The company’s car-making margin dropped to 12.4% in the third quarter, just above the lower end of its guidance range and below the 14.5% level a year ago. The decline follows a wave of inflation in major markets that raised the costs from components to labor, squeezing automakers’ bottom lines.

Under Chief Executive Officer Ola Källenius, Mercedes is directing resources to its most expensive vehicles, including Maybach limousines, AMG performance cars and the G-Wagon off-roader. The carmaker is shifting away from less profitable entry-level models like the compact A-Class.

The strategy is enabling Mercedes to maintain relatively stable prices despite a sharp rise in interest rates that are damping overall demand. Average prices for its cars slipped to €74,600 from €75,400 a year ago.

Mercedes still expects group earnings before interest and taxes around the prior-year level of €20.5 billion, after adjusted earnings in the third quarter declined roughly 8% from 2022 levels. The carmaker reiterated its automaking margin forecast, though said it’s now expected at the low end of the 12% to 14% range. The company expects the vans unit to generate an adjusted return on sales of as much as 15% this year.

Mercedes sales in China are also at risk after the the European Union started investigating the country’s subsidies for electric vehicles, highlighting the growing industrial and geopolitical competition between the two economies. China has proven an insatiable market for German high-end manufacturers’ most expensive models, like the S-Class. Those vehicles, however, are mainly imported, putting them in the line of fire if Beijing retaliates against any EU measures.

Mercedes is intensifying efforts to transform one of the most storied names in automaking into an all-electric rival to Tesla Inc. The company aims to have battery-powered models in all its segments this year, a staging post for its ambition to only sell electric cars by 2030.