Volkswagen profit drops as US tariffs and weak EV demand bite

Volkswagen could begin building its China-specific models in Europe for sale to local markets, or share plants ‌on the continent with Chinese partners, CEO Oliver Blume said earlier this week, after another drop in quarterly profit underscored the need for a fundamental overhaul of the company.

The German auto group, which has lost its decades-long dominance in China and now faces competition from Chinese rivals ​on its home turf, is reviewing under-used plants, product complexity and its sprawling business portfolio in a ​push to become leaner.

Blume said the first quarter had delivered a solid result given tariff pressures ⁠and weak demand.

“But we must also be clear: our current business model in the changed environment is not generating ​sufficient returns,” he said.

PROFIT SLUMP UNDERSCORES COST-CUTTING DRIVE

Management has said current cost cuts, including 50,000 job losses in Germany across ​the group by 2030, will not be enough to secure Volkswagen’s future.

The group, which currently sells about 150 models including through premium brands Porsche (P911_p.DE) and Audi, reported a 14 per cent fall in operating profit to 2.5 billion euros ($2.9 billion) in the first three months of the year.

Analysts had ​expected a broadly flat result, according to a Visible Alpha poll.

Profit was hit by steep US import tariffs – expected to ​cost the company some 4 billion euros this year – and a writedown linked to the decision to end production of its ID.4 electric ‌SUV in ⁠Tennessee amid weak EV demand in the region.

Revenue fell 2.5 per cent to 75.7 billion euros, with weak sales in the United States and China.

OPPORTUNITY OR ‘WOLF IN SHEEP’S CLOTHING’

Blume said partnering with the growing defence sector was the preferred option for underutilised plants like Osnabrueck in the north of Germany, but help could also come from China.

Volkswagen has invested billions of euros in ​development and production in China ​while leveraging local partnerships to ⁠drastically update its product offering for the world’s largest and most technologically advanced auto market.

Volkswagen now wants to check which of its China models could fit the European market, Blume ​said. The company would look into sharing capacity in European factories with Chinese partners, ​he added, without ⁠giving further details.

It is the first time that Volkswagen has confirmed that it is looking at such a move, which could boost jobs and productivity in Germany’s ailing auto industry. However, it also risks letting in “a wolf in sheep’s clothing”, said Bank ⁠of America’s ​Horst Schneider on an earnings call with Volkswagen management.

Chinese carmakers have established ​a small market share in Europe, particularly in Germany, but are slowly gaining ground, with high fuel prices as a result of the Middle East ​conflict offering a boost to their EV-strong offerings.