Volkswagen's Profit Outlook Slashed by Mounting Tariff Costs

German automotive leader Volkswagen has announced a notable revision to its 2025 financial projections, citing a substantial 1.3 billion euro ($1.5 billion) cost from tariffs in the initial six months of the year. This marks the company’s first detailed assessment of the repercussions from recent U.S. trade policies, which have created considerable difficulties for European car manufacturers.

Major European car companies are experiencing significant financial setbacks, issuing profit warnings as they confront U.S. import duties, growing competition from Chinese brands, and domestic regulations pushing for a rapid shift to electric vehicles (EVs).

Volkswagen now expects its full-year operating profit margin to fall within a range of 4% to 5%, a considerable reduction from its previous forecast of 5.5% to 6.5%. The company also anticipates full-year sales to remain stable compared to the prior year, rather than increasing by up to 5% as initially projected. Tariffs alone accounted for the 1.3 billion euro financial impact. Following these disclosures, Volkswagen’s shares experienced a decline of more than 3%.

Volkswagen and other automotive firms are actively engaged in discussions with European trade negotiators to alleviate the 25% tariff. The company stated that results would be at the lower end of its revised projections if current tariffs persist, but could reach the upper end if a reduced rate of 10% is achieved, highlighting considerable uncertainty regarding future tariff developments.

EU diplomatic circles suggest a potential movement towards a general 15% tariff to prevent a broader 30% levy threatened for August 1. Recent trade agreements involving the U.S. and Japan have fostered hope for similar resolutions for Europe.

For the quarter ending June 30, Volkswagen reported an operating profit of 3.8 billion euros, a decrease of more than 25% from the previous year. This decline was attributed to tariff costs, restructuring expenses, and an increased volume of lower-margin all-electric vehicle sales. June's car sales data indicated a broader slowdown in Europe’s automotive sector, with Volkswagen, amidst a major restructuring involving the reduction of over 35,000 positions by the close of the decade, lagging behind.

Despite challenges, CFO Arno Antlitz commented that Volkswagen is making progress, noting that performance was at the higher end of expectations when excluding tariff and restructuring expenses. The group's total net profit for the first half of the year declined by more than 35% year-on-year, settling at 7.28 billion euros ($8.54 billion). The group, encompassing 10 brands, also adjusted its revenue and profit outlook, citing "political uncertainty and increased barriers to trade."

The updated profit margin forecast assumes U.S. tariffs will either remain at 10% in the most favorable scenario or persist at their current rate of 27.5% in the least favorable. North American sales volume decreased by more than 15% in the first half, largely due to tariffs, even as global sales saw a slight increase.

The U.S. President's trade policy, which implemented an additional 25% levy on imported cars in April, has profoundly affected European automakers. U.S. and European Union diplomats are actively negotiating before the President’s August 1 deadline, which includes the threat of a comprehensive 30% duty if no resolution is found.

Mr. Antlitz explained that the ramp-up of EV sales, while strategically crucial, negatively impacted margins due to their lower profitability compared to traditional internal combustion engine vehicles. He further noted that one-time costs, including U.S. tariffs and restructuring measures, collectively reached approximately 2 billion euros.

Key financial insights for Volkswagen in the second quarter include 80.8 million vehicle sales, a more than 2% decrease year-on-year. However, vehicle order intake in Western Europe surged by more than 15% in the first half, and all-electric vehicle orders experienced a substantial rise of more than 60%. The company projects a full-year investment ratio of more than 10% in its automotive division.

Regional sales performance indicated growth of more than 15% in South America, 2% in Western Europe, and 5% in Central and Eastern Europe. These gains largely compensated for anticipated declines of 3% in China and more than 15% in North America, where tariffs significantly influenced performance.

Volkswagen highlighted ongoing risks from political volatility, trade barriers, unstable markets, and stricter emissions standards. The company's outlook is based on the assumption that U.S. import tariffs will either remain at 27.5% or decrease to 10%, acknowledging the high degree of uncertainty surrounding trade policy.