European car makers, including German giants Mercedes-Benz AG and Porsche AG, face growing headwinds in 2025. Rising production costs, tariff uncertainties, and declining earnings in China have created significant hurdles for the industry.

Goldman Sachs recently downgraded both Mercedes-Benz and Porsche, citing these challenges and forecasting a tough year ahead for the sector. Analyst George Galliers noted that rising labor costs, regulatory pressures, and weakening profitability in China are dragging the industry down. He pointed out a 12% decline in European auto stocks in 2024 and projected further earnings cuts of 9% for 2025 and 6% for 2026.

Battery Electric Vehicles and Declining Chinese Profits

Battery Electric Vehicles (BEVs) are a central challenge for European car makers. Despite projected growth in BEV sales from 14.3% in 2024 to 19% in 2025, high production costs continue to erode profit margins. Regulatory demands for reduced CO2 emissions drive this growth, but Galliers questioned whether increased sales could offset financial pressures.

Another major issue is the sharp decline in profits from Chinese joint ventures. Goldman Sachs reported a 36% year-on-year drop in earnings from these ventures in 2024. Western car makers, including Ford and General Motors, have already seen their Chinese operations turn unprofitable, sparking fears that European companies could follow suit.

Galliers emphasized that the world’s largest automobile market poses significant risks for European manufacturers, exacerbating existing financial pressures.

Downgraded Outlook for Porsche and Mercedes

Goldman Sachs downgraded Porsche SE from “Buy” to “Sell,” highlighting limited growth opportunities and ongoing financial vulnerabilities. Weakening demand for BEVs in Western markets and challenges in China contributed to this downgrade. Financial concerns, including high leverage and Volkswagen’s restructuring efforts, further limit Porsche’s near-term improvement prospects. Goldman expects Porsche’s net debt to remain above €4 billion until 2027.

Mercedes-Benz AG was also downgraded, moving from “Buy” to “Neutral.” Goldman cited uncertainties around luxury vehicle sales, an ageing S-Class lineup, and mixed reception for AMG models. Mercedes’ car division saw a 44% decline in adjusted earnings before interest and taxes (EBIT) by Q3 2024, with a full-year drop of 40% expected. Another 14% decline is anticipated in 2025, with a modest recovery projected for 2026.

Galliers suggested investors may demand a reset of Mercedes’ margin targets, given ongoing BEV profitability challenges and weakening contributions from China. However, advancements in autonomous driving technology and partnerships with Nvidia could offer long-term potential for Mercedes.

Trade Tensions and Potential Silver Linings

Trade and tariff uncertainties add to the industry’s struggles. The European Union imposed tariffs on Chinese-made BEVs, and escalating tensions with the Donald Trump administration could disrupt supply chains further.

Galliers warned that the global nature of the auto industry makes manufacturers especially vulnerable to tariff increases.

Despite these challenges, Goldman Sachs highlighted Renault as a potential bright spot in the European auto sector. Strong cost discipline and a promising product pipeline position the French car maker to weather market turbulence better than its German counterparts.

Galliers concluded: “Europe’s car makers face profound challenges, but adaptability will determine their future in this rapidly evolving landscape.”