By William Boston

BERLIN -- $MERCEDES-BENZ GROUP AG(DDAIF.US)$, the German luxury carmaker, saw net profit fall nearly a fifth in the first three months of the year because of higher costs, including expenses related to the suspension of business in Russia in the wake of the war in Ukraine.

The Stuttgart-based automaker of Mercedes-Benz branded cars and vans said on Wednesday that business throughout the year would be impacted by the continuing shortage of semiconductors, rising raw materials prices, and continued disruptions from the Covid-19 pandemic, and new volatility in supply chains from the war.

The geopolitical and macroeconomic conditions continue to be characterized by an exceptional degree of uncertainty, including the war in Ukraine, its impacts on supply chains, and the development of prices for raw materials and energy." 

-Mercedes said.

The warning offers a glimpse of the struggles facing European manufacturers as they attempt to navigate an unprecedented succession of economic shocks that are complicating planning, raising costs, gumming up production and depressing demand.

Auto manufacturers, in particular, have been struggling to cope with higher costs from rising raw-materials and energy prices, a shortage of semiconductors, the impact of Covid-19 lockdowns on their supply chains, and now new bottlenecks caused by the war in Ukraine.

Mercedes said in its interim report that net profit attributable to shareholders fell to EUR3.49 billion in the three months ended March 31, compared with EUR4.29 billion the year before, resulting in a drop in earnings per share to EUR3.26 from EUR4.01 the year before.

One reason for the drop was Mercedes's decision to suspend business with Russia after Moscow's attack on Ukraine, a decision the company said resulted in expenses of EUR709 million, equivalent to $754 million.

Mercedes-Benz new car sales fell 10% to 487,008 vehicles in the first quarter "mainly due to semiconductor supply bottlenecks, Covid-19 lockdowns, as well as the war in Ukraine," the company said in its report.

Mercedes was able to offset some of the negative impacts on its earnings through currency hedging, one-off asset sales and its ability to boost revenue through higher prices and a continued shift in its model offering to more upscale, higher-priced luxury vehicles.

Mercedes earnings before interest and taxes, which doesn't include special charges and expenses, rose 11% to EUR5.23 billion in the quarter.

Looking ahead to the full year, Mercedes largely stuck to its outlook given after the close of the 2021 business year, but warned that the months ahead were fraught with volatility and uncertainty.

The general market risks have risen from medium to high compared to the annual report 2021." 

-the company said.