The dismal performance of Mercedes echoes the struggles of BMW, Volkswagen, and Porsche in China.

All three companies reported second-quarter sales declines of at least 30%, worse than the overall market's drop.

Meanwhile, homegrown brands like Xiaomi and BYD are stealing their customers away, depriving these German firms of a key growth and profit driver.

So far, none has found a way to stop this downward spiral.