The US tariff hammer aimed at EU vehicles, particularly striking German automakers, has become a focal point of global automotive tension. In early 2025, following Donald Trump's return to the White House, an executive order abruptly hiked import car tariffs from 2.5% to a staggering 27.5%, instantly plunging US-dependent German manufacturers into an unprecedented storm. Although a hard-won EU-US agreement in late July dialed the rate back to 15%, this still represents a six-fold increase over the original level. For Germany's auto industry, the brief respite hasn't lifted the crushing weight.
This pressure stems from deep German entanglement with the US market. In 2024, German exports of cars and parts to America, valued at a hefty €36.8 billion, accounted for nearly one-fifth of its total exports. The sudden tariff surge directly strangles profit margins, forcing these giants into a hurried global review of supply chains and factory footprints in search of safe harbors.
The shockwaves rapidly materialized in stark financial reports. Audi's net profit plummeted 37.5% in the first half of 2025, with CFO Jürgen Rittersberger bluntly stating US tariffs alone cost the company around €600 million. BMW Group is similarly reeling, projecting total tariff costs this year could reach a massive €1 billion – enough to slash its automotive operating margin by 1.25 percentage points. Even BMW's significant US production base struggles to fully absorb this cost explosion. Mercedes-Benz wasn't spared either, seeing its Q2 operating profit shrink by a third. Most alarming was Porsche: the famously high-margin luxury brand suffered a devastating 91% plunge in Q2 operating profit, laying bare the brutal impact on the premium segment.
The German Industry Federation (BDI) labeled the new agreement a "painful compromise," warning of its "massive negative impact" on Germany's export-driven economy. A subtle wrinkle is that the US maintains a 25% tariff on cars built in neighbouring Canada and Mexico, while EU vehicles get a 15% "preference." This offers German cars a sliver of relative advantage in the US market, but the complexity and cost of reorganizing supply chains could easily erase it.
A deeper threat looms over jobs and industrial relocation. Ferdinand Dudenhöffer, Director of the Center Automotive Research (CAR), warned that a 15% tariff could endanger up to 70,000 jobs across Europe's auto supply chain. To dodge the tariff wall, carmakers are accelerating moves to shift production stateside. Volkswagen Group is seriously considering a new Audi factory in the US, while BMW and Mercedes-Benz are also evaluating expanding North American capacity. Yet, these are long-term fixes – new plants demand years and massive investment – while the immediate damage is already done.
But the challenges don't stop there. Beyond the tariff sword hanging overhead, German carmakers are mired in multiple crises: persistently rising raw material costs, lingering energy insecurity, and the colossal funding required for the electric vehicle (EV) transition – each a heavy burden. The US's stubborn 50% tariff on steel and aluminum adds further strain to an already fragile supply chain. Although the EU-US deal hints at replacing high tariffs with quotas, vague details offer little short-term relief.
The essential path towards electrification is also growing rockier due to squeezed cash flow. Volkswagen's ambitious €180 billion electrification plan through 2030 now faces the harsh reality of US tariffs eroding profits. Shrinking cash reserves inevitably target R&D budgets first, threatening to derail the transition. The new deal offers slight breathing room, but the 15% tariff remains a shackle on German competitiveness in the EV arena.
Within this intricate web of trade and economic pressures, German automakers are being forced to redraw their global maps. Increasingly, eyes turn towards China, with its comparatively stable regulatory environment and clearer growth outlook. Through localised production, deeper tech partnerships, and strategic investments, German carmakers are actively reshaping their strategic presence in Asia. BMW's collaboration with Chinese tech firm Momenta to develop next-generation smart driving assistance solutions is a clear signal of this pivot.
However, the German auto industry's troubles aren't solely born of tariffs. The sector is undergoing a profound paradigm shift globally, and Germany's giants are fighting for survival amidst converging crises. Moving forward, they must seize opportunities within the turmoil, leveraging relentless innovation and decisive strategic adjustments to regain competitiveness, while remaining vigilant against the potential global backlash of rising protectionism.
The storm's effects are now rippling upstream through the supply chain. Polyurethane (PU), an essential material in modern car manufacturing, is widely used in seats, dashboards, door panels, and steering wheels, prized for its weight reduction, noise insulation, and enhanced comfort. Yet, when a behemoth like Audi sees its global deliveries fall by roughly 6% in H1 2025, demand for these PU components shrinks significantly. If German and broader European auto production and sales remain suppressed, the PU industry itself faces a potential winter of idle capacity and falling prices.
In sum, German carmakers are navigating a perilous path. Ahead lies the persistent shadow of punishing US tariffs; on either side, chasms of shrinking demand, soaring input costs, and the high-stakes EV transition. In this uniquely complex puzzle, only agile course correction and an active hunt for new growth opportunities can sustain the hard-won global competitiveness forged over a century.
