A Demand Boom That Erodes Profitability

In the third quarter, electric models accounted for 26% of sales for the VW, Audi, BMW and Mercedes brands, up from 19.5% a year earlier. In October, 37% of new car registrations in Europe were electric, a record. The driver is clear: soaring fuel prices linked to the war in Iran, reinforced by public subsidies. According to analyst Horst Schneider of Bank of America, drivers can save 50% of running costs at current prices.

Yet this success comes at the worst possible time for the bottom line. The battery remains the component that prevents electric production at the cost of combustion engines. At VW, the margin on the ID.Cross reaches only 70 to 80% of that of a comparable combustion model, and other series fare worse. Both VW and Mercedes expect cost parity only at the end of the decade.

An Order Book That Worsens the Mix

Electric vehicles account for 40% of VW's order book, including 150,000 orders for the ID.Polo small-car family, which is barely profitable. At one Mercedes dealership, 60 to 70% of pre-orders are electric. VW's finance chief, Arno Antlitz, expects margins to come under even greater pressure.

China: From Profit Engine to Black Hole

The second shock comes from China, where the combustion segment, on which German brands still depend, is collapsing: -28% over nine months, -42% in the third quarter. VW posted its first nine-month loss there, of €113 million, against a profit of €744 million a year earlier. Mercedes now draws only €37 million from its joint venture in the third quarter, against €602 million a year before. BMW plans to cut 1,800 jobs at its Chinese joint venture.

Signs of Payback, but Fragile

The picture is not uniformly bleak. BMW says the iX3 is close to parity in certain key European markets. VW's net cash flow reached €4.4 billion over nine months, against €1.8 billion, but that is explained by reduced investment and asset disposals, not by better profitability. At BMW and Mercedes, free cash flow fell 73% and 44% respectively, partly because of inventories linked to model-line renewals.

A Dilemma With No Quick Way Out

The fourth quarter looks harder. BMW forecasts an annual automotive operating margin of between -0.5% and +0.5%, against 3.5% after three quarters. VW expects operating profitability of between 0% and 1%. Provisions for restructuring plans, including 8,000 job cuts at BMW, and the expected rise in the cost of steel, aluminium and battery raw materials will also weigh.

The dilemma is clear. Restraining electric supply would protect margins in the short term, but would leave market share in Europe to Chinese manufacturers. Producing it in volume deepens the erosion of profits. The data in the file, however, allows neither quantification of the effect on German exports, for lack of usable trade statistics, nor confirmation that the trend will persist beyond 2027.

This article was written with the assistance of artificial intelligence and verified by our editorial team.