Volkswagen's Profit Woes: Trade Wars and EV Transition Squeeze Margins

Volkswagen’s first-quarter 2025 results painted a stark picture of the challenges facing the automotive giant: a sharp drop in profitability, driven by trade tensions, rising electric vehicle (EV) production costs, and the lingering fallout from regulatory and historical issues. The automaker’s operating profit fell to €2.8 billion, a 40% decline year-over-year, underscoring the precarious balance between growth and margin management as the industry transitions to electrification. Let’s dissect the data to understand the risks—and opportunities—this presents for investors.

Trade Tensions: A Tariff-Laden Headwind

The report highlights the U.S. tariffs as a critical pressure point. A 25% import duty on Volkswagen-branded vehicles—applied to 65% of its U.S. sales—and 100% for luxury brands like Audi and Porsche—added €300 million to one-off costs in Q1. While the tariffs were first imposed under the Trump administration, their lingering impact remains unresolved. With trade tensions showing no sign of abating, this financial drag could intensify.

The automaker’s CFO, Arno Antlitz, noted that current forecasts exclude further tariff escalation, a caveat that raises red flags. Should trade barriers expand, Volkswagen’s already strained margins—now at 3.6%—could face even deeper erosion.

The EV Transition: Growth vs. Profitability

While EV sales more than doubled in Europe, the shift to electric is proving costly. Unlike internal combustion engine (ICE) vehicles, which historically carried 10-15% margins, EVs currently operate at breakeven or lower. Volkswagen’s operating return on sales (RoS) plummeted to 3.6% in Q1, down from 6.0% a year earlier, reflecting this margin compression.

The company’s plan to launch over 30 new models in 2025—including EVs—aims to boost revenue. However, scaling production and achieving cost efficiencies in battery technology remain critical. Competitors like Tesla (TSLA) have already achieved economies of scale, with its gross margin hitting 25% in Q1 2024. Volkswagen’s path to similar profitability hinges on replicating this success while navigating rising input costs.

Regulatory and Structural Costs

One-off expenses totaling €1.1 billion further strained results. The €600 million provision for EU emissions regulations underscores the escalating compliance costs as regulators tighten standards. Meanwhile, the €200 million write-down for CARIAD, Volkswagen’s struggling software unit, highlights the risks of its ambitious tech ambitions. The remainder—€300 million—covered ongoing dieselgate liabilities and tariff-related write-downs.

These costs are not isolated. Automakers globally are racing to meet stricter emissions targets, with the EU’s 2035 ICE ban looming. Volkswagen’s ability to pivot its supply chain and software capabilities will determine whether these expenses become a recurring drag or a one-time adjustment.

Outlook: Can the Profit Picture Improve?

Volkswagen forecasts a 5% revenue rise for 2025, with an RoS target of 5.5-6.5%. However, this excludes potential tariff impacts, meaning the current 3.6% Q1 figure may be a harbinger of worse results if trade tensions escalate. CFO Antlitz’s focus on cost discipline and new models offers hope, but execution is key.

Investors should also note Volkswagen’s robust liquidity: €33 billion in automotive division net liquidity as of Q1 2025. This provides a cushion to weather near-term storms, but long-term success requires more than survival—it demands margin recovery.

Conclusion: Navigating the Crossroads

Volkswagen’s Q1 results reveal a company caught between two forces: the imperative to invest in EVs and software for future growth, and the immediate profitability hit from trade barriers and regulatory costs. While its liquidity and ambitious product pipeline offer reasons for cautious optimism, the path to sustainable margins remains fraught.

The critical question is whether Volkswagen can replicate Tesla’s margin trajectory or if it will remain mired in mid-single-digit RoS. With EV sales growing but margins lagging, and tariffs acting as a wildcard, investors should monitor two key metrics:
1. Operating margin progression—Can Volkswagen hit its 5.5-6.5% target without tariff escalation?
2. EV cost efficiencies—How quickly can it reduce battery and software development costs to match rivals?

For now, the jury is out. Volkswagen’s stock—down 12% year-to-date—reflects this uncertainty. Yet, with a dominant market position in Europe and a vast product pipeline, the company isn’t out of the game. The next 12 months will be pivotal in determining whether it can turn the corner or succumb to the triple threat of trade, regulation, and electrification.

Investors would be wise to keep a close eye on both its financial metrics and geopolitical developments. The road to profitability is narrow, and Volkswagen must navigate it skillfully to avoid a prolonged detour.