Germany is in trouble. And not just with its auto industry. What has long been Europe's economic powerhouse has seen two consecutive years of GDP contraction. Now, its automotive heavyweights seem to be struggling with sales and meeting the electric and software-driven future, compounding an already tough issue.
Add in high energy costs, high labor costs and, now, tariffs—how are they going to turn things around?
The State Of Play
Let’s start with the numbers. Volkswagen’s operating income fell 37% year over year in the first quarter of 2025. BMW’s earnings before interest and taxes dropped 28.3%. Mercedes’ fell an astounding 40.7%. (Mercedes claims some of that decline was due to one-time factors, and the “adjusted” decline was 29%, still rough.) Those are not the sort of numbers you can put on the board without providing some answers.
There’s bad news there, and there’s worse news. The bad news is that all three are highly exposed in the Chinese market, which has lost much of its appetite for European cars. There is still some demand on the high end, but by and large, Chinese domestic automakers are building cheaper, more advanced EVs than any Western brand.
So that’s the bad news.
The worse news is that the other profitable export market—the United States—just imposed a 25% tariff on all imported vehicles. And I do mean “just.” The 25% tariff’s effect had not reached the market by the time these companies reported earnings. Plus, today Trump threatened 50% tariffs on the EU. It is going to get worse before it gets better. Which automaker has the biggest problem, and which one has the best plan to turn it around?
BMW: Good Products, But More To learn
BMW is one of two German brands making EVs that I recommend to friends who are in the market for something nice. The other is Porsche, but those are far more expensive. BMW started trying hard on EVs a decade ago, and while the i8 and i3 were odd products, they paved the way for the i4 and iX to hit the ground running.
That early-mover advantage paid off. Get over their big, toothy smiles and the modern i-Cars are solid EVs with reasonable specs, good software, solid driving dynamics and fair value propositions. The i5 and i7 follow the same formula, and while none of the BMWs are leading the world in EV tech, they’re all good options.
If the i3 was BMW’s first generation EV, and the i4 et. al are the second generation, its upcoming “Neue Klasse” vehicles are supposed to prove that the third time’s the charm. These models will offer 800-volt architectures, lightning-fast charging and far more advanced EV batteries and powertrains than existing BMWs. They’ll also offer a new generation of “Panoramic iDrive” with AI. The new system, with its door-to-door screen, should offer more of a software-defined experience, with more of the tech features you see in Teslas and Chinese EVs.
Will that be enough to establish BMW as more of a leader in the EV space? It certainly bodes well in the West, where most of the luxury EVs on sale still feel like early efforts. Software-defined design is also a key way to drive down cost, as is newer battery tech, so I’m hoping the company can offer more value on its next generation of EVs. (BMW did not reply to my request for comment.)
But even if it does, it’s going to be hard to compete in China, where it saw a 13% sales drop last year. Chinese EVs are offering more sophisticated battery and charging tech than Western brands at lower prices, and are themselves iterating at a faster clip. Western automakers may be able to match that pricing eventually, but developing those economies of scale is easier for bigger players. Since BMW is a luxury marque, it doesn’t have world-beating scale. That’s not BMW’s fault, but it is, unfortunately, its problem.
So are tariffs, which are hitting products it makes in Europe and Mexico. But its most profitable SUVs are at least built in the U.S., with far greater U.S. parts content than its Audi or Mercedes rivals.
Mercedes: Weaker Start, Bigger Fall
Mercedes’ top-line decline was the worst, and I’d argue that’s partly because it’s gone further off track than the other two German giants. Its egg-shaped lineup of EQ-branded EVs was mostly a flop. Three-year-old used EQS sedans sell for about a third of their original price, and Mercedes dealers can’t seem to give new ones away.
Mercedes tried to turn the C63 into a plug-in hybrid with disastrous results, and is already backtracking from that strategy, its EQ-names and its ambitious electrification goals.
Mercedes is betting the three-pointed star on its next generation of EVs, starting with its entry-level CLA-Class. The CLA promises a true software-defined EV experience, an 800-volt architecture, a Tesla-style NACS plug in North America and a whole bunch of AI-powered features. It’ll be offered as both a hybrid and an EV, a sign of the firm’s shifting strategy, and should launch this year.
“The all-new CLA kicks off our multi-year product and technology offensive, creating fresh momentum for Mercedes-Benz,” a Mercedes spokesperson told InsideEVs via email. “Desire for our current portfolio sustains our leadership position in the Top-End vehicle segment, including in China. This, combined with a healthy balance sheet provides a solid foundation to navigate our company through a period of geopolitical uncertainties.”
Our man Andrei Nedelea saw it in person and came away thinking it may be “more compromised than we had hoped.” But you can’t make final judgments about a product until you drive the finished version, so I’m not counting it out yet.
That being said, I haven’t been too impressed by Mercedes’ direction in recent years. The company seems to see itself primarily as a tech firm, going all-in on every trend. But this can sometimes lead to a disjointed brand identity. It is simultaneously trying to sell the old-world concept of luxurious refinement and the new age of AI-powered cars with enough flashing lights to outshine a strip club. The E-Class, a car I associate with dentists and German taxi drivers, now natively supports TikTok and ChatGPT. It seems to be throwing things at the wall to see what sticks.
Offering consumers cutting-edge technology is certainly important. But Mercedes has so far struggled to deliver the sort of cohesive, serene experience its old buyers expect while also providing a first-class software experience. It has the same scale issue as BMW and the same China issue as everyone else, but it is the smallest of the three and starting from, in my view, the worst position. It is also extremely exposed to U.S auto tariffs, with even its made-in-America products being built almost entirely out of foreign parts.
“[M]aterial impacts are expected” if the tariffs persist unchanged through the rest of the year, a Mercedes spokesperson told InsideEVs. “The current volatility with regard to tariff policies, mitigation measures and resulting potential direct and indirect effects in particular on customer behaviour and demand is too high to reliably assess the business development for the remainder of the year,” he added. It seems like Mercedes’ toughest year just got tougher.
The company needs the CLA and its next generation of electrified cars to succeed. It can’t afford to make too many more mistakes.
Volkswagen: The Giant Stumbles
BMW and Mercedes are smaller players. They produced fewer cars last year than companies like Chery, SAIC, Suzuki, Nissan and Honda. VW Group is Goliath, outdone on the sales charts only by Toyota. But we all know what happened to Goliath in that story.
These days, there are a lot of Davids emerging in China, and they have some really good slingshots. Volkswagen was the largest automaker in China for quite some time. That changed in 2024, when BYD unseated VW. Add in the Geely Group brands, Xpeng, Nio and scores of others, and you have a recipe for disaster. The bleeding hasn’t stopped, with even Porsche struggling to stay relevant in the dynamic and highly electrified Chinese market.
A spokesperson for VW noted that the company is just beginning its offensive of software-defined, electrified product launches. The group will launch 20 electric and electrified models in China by 2027, and just launched a new local version of its Audi brand. Things are looking up, but it’s too soon to tell whether this will be enough.
Then there’s America, a nut VW hasn’t really cracked since the original VW Bus days. The Volkswagen brand has about the same market share in the U.S. as Tesla or Subaru, which is a bad performance for what’s supposed to be a high-volume brand. Audi, Porsche, Bentley and Lamborghini do alright in the U.S., but volumes are small. And almost everything the auto giant sells here is imported, except for the middling VW ID.4 and the large Atlas and Atlas Cross Sport SUVs. Its forthcoming Scout revival is the company’s best effort yet to reconquer America, so we’ll see how that goes.
VW has also taken quite a bit of action at the high level: It’s trimming its workforce, partnering with Mobileye on autonomy, leaning on Rivian for next-gen electrical architecture and software expertise and increasing its cooperation with local Chinese partners like Xpeng.
But relying on outside companies for software, autonomy, EV know-how and electrical architectures will not be enough on its own. The company knows this, which is why it says its troubled in-house software arm Cariad will take leadership in autonomy and infotainment, while its EVs mature. It’s recognizing that VW needs to get faster and sharper unless it wants to end up as a contract manufacturer or a project management firm. It needs to prove it can make profitable EVs that consumers want in either the U.S. or China, and ideally in both.
That’s the challenge for all three companies. The Germans built their automotive empire by making world-class engines and transmissions and pairing them with cars that consumers across the world would happily pay a premium for. Now, they need to replicate that success in the EV world. Doing so requires more than just adding an electric powertrain to existing cars. It requires a full rethink of the car-building process.
All three companies are doing that work. But the process is long and expensive. Worst of all, it isn’t guaranteed to work.
Contact the author: Mack.Hogan@insideevs.com.
