European carmakers are expected to see a decline in profitability in 2025 due to global trade tensions, weakening demand in China, and the shift to electric vehicles, according to Fitch Ratings. U.S. tariffs, rising raw material prices, and ongoing cost pressures will strain margins. Volkswagen and Mercedes-Benz are particularly at risk.

Tariff risks are significant for companies exporting vehicles from Japan, Korea, and Germany to the U.S. Volkswagen’s luxury brands Audi and Porsche may face pressure on free cash flow. Mercedes-Benz could be exposed to retaliatory Chinese tariffs. Automakers are expected to shoulder the larger share of higher tariffs.

European auto production remains below pre-pandemic levels due to slower EV transition, foreign competition, and shifting consumer preferences. Car manufacturers are rationalizing operations through plant closures and layoffs, impacting short-term cash generation. German premium brands in China are losing market share to domestic players amid intensifying price competition.

Fitch forecasts increased battery EV sales for European automakers in 2025, driven by new model launches and competitive gains against non-EU rivals. However, tighter margins are expected as Chinese brands expand in Europe. Profitability and free cash flow generation declined in 2024 and are likely to worsen in 2025, leading to Negative Outlooks and rating actions across the sector.

Read more at Yahoo Finance: European automakers face profitability squeeze in 2025: Fitch