German luxury carmaker BMW posted a drop in net profit for the second quarter on Thursday, dragged down by higher manufacturing costs and weakening demand in key market China.

Net profit at the BMW group — which also includes the Rolls-Royce and Mini brands — declined by 8.6 percent to 2.7 billion euros ($2.9 billion) between April and June, on the back of revenues down 0.7 percent to just under 37 billion euros.

Car deliveries dipped by 1.3 percent, to 618,743 units.

Deliveries in China were down 4.7 percent, where cooling domestic consumption and increased competition from local brands is hitting European carmakers hard.

“In China, in particular, revenues were impacted by heightened competition and weaker consumer sentiment,” BMW said.

BMW said it expected “the economic situation to begin to stabilise” in China in the third quarter.

Higher manufacturing and personnel costs and spending on IT projects also hurt the group’s earnings, BMW said.