Germany’s flagship carmakers are feeling the full weight of today’s geopolitical and economic realignments. Mercedes-Benz and Porsche, two of Europe’s most internationally visible brands, issued stark warnings this week about falling profits and declining global demand, a signal that the luxury auto sector may be entering a more turbulent era.
Both companies sharply downgraded their financial projections for the remainder of 2025. Mercedes-Benz now expects its full-year revenue to fall “significantly below” 2024 levels, after first-half profits dropped by more than 50 percent. The brand’s U.S. sales shrank by 6 percent, while its sales in China—long a dependable growth engine—plunged 14 percent. Porsche, which is majority owned by Volkswagen Group, issued its third earnings revision of the year, citing a two-thirds collapse in profit, with €400 million lost to tariff-related costs alone.
At the heart of the downturn is a cocktail of geopolitical friction and market fatigue. U.S. tariffs, reintroduced earlier this year by President Trump, hit European luxury automakers hard. Porsche, with its entire production base in Europe, has been particularly exposed. For months, German brands faced tariffs of up to 27.5 percent on cars shipped to the United States. Although a new EU–U.S. trade deal has since reduced that figure to 15 percent, the damage is already apparent in company balance sheets.
Meanwhile, hopes of sheltering behind strong Chinese demand have faded. Porsche reported a staggering 30 percent drop in Chinese sales in the first half of the year. Analysts point to a combination of increasing local competition and consumer fatigue in the high-end segment. Price sensitivity in China’s wealthier consumer base has increased, even as domestic brands offer compelling electric alternatives at more competitive price points.
Mercedes-Benz’s case is more complex. While the company builds its high-volume SUVs in the U.S. for export to Europe and Asia—putting it in a somewhat more advantageous position than Porsche—it too has been caught in the broader crossfire. Some of its Alabama-produced vehicles faced Chinese tariffs as high as 100 percent earlier in the year, before Washington and Beijing reached a fragile truce in May.
Europe’s carmakers are now in a bind. On the one hand, the EU’s willingness to lower car import tariffs in exchange for U.S. concessions has been met with internal criticism, particularly in Germany, where the automotive sector is both symbolically and economically central. On the other hand, executives at Mercedes have argued that the transatlantic deal might actually benefit European producers with globalised supply chains.
“It is not a gift to the U.S.A.,” said Harald Wilhelm, Mercedes-Benz’s CFO, noting that certain aspects of the agreement “will help, not hurt us.”
But that optimism remains conditional. With Chinese competition intensifying and the U.S. market becoming less predictable, Europe’s prestige automakers are being pushed to rethink both their global footprint and long-held assumptions about demand resilience. The luxury badge may still carry weight—but increasingly, it is being tested against the hard edge of geopolitics.