I believe Mercedes/BMW/Audi/VW sales in China will only go downhill, at best stagnate. The reason for this is that Nio, BYD, Xpeng, Xiaomi, Avatar, etc, they managed to make accessible for the masses what was only available for the rich. They managed to give almost the same technology (if not newer) and luxury like in the premium German cars for half the price.
I think this is enough of a reason for the Chinese buyers to buy the local brands (with all of their quality issues) and not pay at least double the price for the German brands.
Mercedes should stay true to their brand and legacy and offer premium products even in China. They shouldn't dilute the brand just for the sales. If they really want to get the numbers, then probably they should make a new car brand (like BYD's Denza) , associate it with Mercedes and then do whatever they want out of it to be able to compete with the Chinese brands.