A massive profit warning from BMW AG last week delivered yet more evidence that Germany’s automaking business model is broken. With Volkswagen AG’s top executives reportedly worried about existential threats to their company, BMW’s woes aren’t isolated.
The German industry’s ambitions have been upended by formidable Chinese rivals, leaving these companies with no choice but to downsize. Although a recovery isn’t guaranteed, the US market at least offers them some hope.
For decades these automakers were linchpins of the country’s export machine and their engineering prowess a source of national pride. Bolstered by the cheap euro, increasing global wealth and free trade, pricey German limousines, utility vehicles and sports cars became world-renowned status symbols. Fat profits booked from overseas customers — particularly in China — supported well-paid German manufacturing jobs.
Those halcyon days are over. German carmakers’ sales in China are plummeting as the economy there weakens and local customers decide combustion engines are too expensive or old hat. Xioami Corp., BYD Co. and others offer compelling electric vehicles for more reasonable prices. Their German rivals are losing relevance: They accounted for less than 2% of China’s EV sales in the first quarter of 2026.
Chinese EVs and hybrids are showing up in Europe, too, where the car market has shrunk since before Covid and competition is intensifying. As if that weren’t enough, German car exports to the US now face 15% import tariffs, making shipments from Europe less profitable. Today, “made in Germany” sometimes “seems like an obstacle” because of protectionism, swelling costs and stringent regulations, Porsche’s new chief executive officer Michael Leiters was expected to tell its annual meeting on Tuesday. “We must invent ‘made in Germany’ anew.”
These troubles have been brewing a while. Last year, Porsche’s misfiring electric strategy and worsening Chinese demand contributed to its worst sales decline since the 2009 recession.
The more conservatively managed BMW seemed to have a better grip, having insisted on technological flexibility rather than following the EV stampede. Yet its autos division might now eke out only a 1% operating margin this year. Restructuring measures needed to counteract its China problems are weighing heavily. The unit could be headed for its weakest yearly results since 2009.1
Unlike the aftermath of the global financial crisis, there’s little prospect of a quick rebound: “BMW's challenges today feel chronic” says Oxcap Analytics autos analyst Stuart Pearson.
Mercedes, VW and Porsche are already cutting back to adapt to lower demand. VW’s factory network was built to produce 12 million vehicles annually; 9 million is now considered more achievable.
VW’s market value has shrunk to just €40 billion ($46 billion) or so, its lowest point since 2010 and worse than during its diesel emissions scandal. Its majority stake in Porsche is worth roughly €33 billion, meaning shareholders ascribe very little value to the rest of its sprawling car empire.
Executives sometimes paint a bleak picture to get workers to make concessions. But I don’t think they’re exaggerating the gravity of the situation. VW’s boss Oliver Blume told shareholders last week that the risks faced by the company have never been as great.
Germany’s automakers already assemble cars around the world and their designs are increasingly tailored to local market tastes. Yet they still have vast workforces back home where labor costs are high. VW wants to cut 50,000 jobs by the decade’s end. Mercedes is reducing capacity in Germany, and expanding in cheaper Hungary. The Kecskemét plant there will soon be the company’s largest in Europe.
BMW and Mercedes may need to rethink their exporting of combustion engine powertrains from Germany, according to Jefferies analyst Philippe Houchois, and instead make them in North America and China. “Being a global carmaker with value-added concentrated in Germany doesn’t work anymore,” he tells me.
The good news is Germany’s automakers all have hefty cash reserves. And after investing vast sums in software and EVs, cars like BMW’s iX3 and the Mercedes CLA are far more convincing than previous electric efforts.
However, the days of German engineers and designers schooling China are over. VW’s impressive ID.UNYX 08 electric SUV was developed in China with local partner Xpeng Inc. Audi’s new Chinese sub-brand targeting younger buyers doesn’t feature its iconic four interlocking rings logo. That speaks volumes about its fall from grace.
Developing new models in China makes sense, and German firms should consider using it more as a hub for exports to emerging markets. Their vehicle sales in China itself, however, likely won’t rebound by much.
The US market looks a better bet, in part because emissions regulations have become less onerous during Donald Trump’s presidency.
Having sacrificed sales volumes trying to push its brand upmarket, Mercedes is now aiming to lift its US sales by more than 30% by end of this decade. VW, too, is optimistic about America, although all Audis and Porsches sold in the US are imported. Given Trump’s tariffs, they might have to remedy that. Porsche CEO Leiters said Tuesday that price increases have helped a bit in counteracting the impact of US levies; it still sees “stable, solid demand” in the US, which will “remain Porsche’s most important market.”
Of course, the US is no panacea. Competition to tap the world’s largest population of millionaires is intensifying. Last week India-owned Jaguar Land Rover laid out plans for a huge American expansion.
The plight of Europe’s automakers hasn’t gone unnoticed by its politicians, although their interventions are a little late. Brussels has softened its combustion engine ban and might consider hitting China’s plug-in hybrid imports with tariffs.
If Germany’s ailing giants still can’t catch a break, they should make structural changes to convince investors to stop shunning them. VW’s Lamborghini unit and BMW’s Rolls-Royce might be worth €25 billion and €16 billion respectively, if spun out from their parent companies, according to Bloomberg Intelligence. Alas, Porsche’s dismal performance since its 2022 initial public offering shows there are no guarantees for even the grandest of industry names.
In its glory days Porsche aimed for 20% operating profit margins from automaking, while BMW and Mercedes aspired to around 10%. Today, those goals look out of reach. Failing to adapt would herald an even bigger collapse.
1. BMW's new guidance is for an automotive EBIT margin of between 1% and 3%.
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