(Sept 19): Volkswagen AG slashed its profit forecast after a sharp contraction in China and a €6 billion (US$6.9 billion or RM28.11 billion) writedown tied to sports-car maker Porsche AG, deepening concerns about the strains facing the global auto industry.

Europe’s biggest carmaker now expects an operating margin of no more than 1%, it said Friday, citing the accelerating shift to EVs in Europe as another drag on profitability. The shares slumped 7.5%, the most in a year, triggering a broader sell-off in automakers including BMW AG, Ford Motor Co and Stellantis NV.

The manufacturer had previously expected an operating margin of at least 4%. VW pegged total charges weighing on results this year at about €10 billion, which include restructuring costs tied to workforce reductions and writedowns on assets in China.

Excluding those items, Volkswagen said its operating margin would be around 4%.

“But even that is not enough to invest forcefully in the future,” chief financial officer Arno Antlitz said in an internal interview seen by Bloomberg News. “The financial development shows: We have no time to lose.”

The broad pullback highlights concerns about the auto industry. Carmakers in Europe and the US are grappling with weaker pricing, costly EV investment, pressure from Chinese rivals and uneven demand. 

That’s raising questions over how much of VW’s deterioration is company-specific and how much reflects a wider squeeze on sector profits. In June, BMW also cut back its expectations for the year, for an operating return of as low as 1%.

The warning deepens the challenge for chief executive officer Oliver Blume, who is trying to overhaul Europe’s biggest carmaker as its former growth engines falter. Earlier this month, VW struck a hard-fought agreement with labour representatives that could double planned job cuts to 100,000 globally, while management is also under pressure to reduce excess factory capacity and costs in Germany.

The setback goes to the heart of the model that powered Volkswagen’s expansion for much of this century. Rich profits from China and its premium brands helped support a sprawling manufacturing base in Germany and finance investment in new technology. Now those pillars are weakening: Porsche is resetting expectations, China is becoming less lucrative and the shift to electric cars is eroding margins before cost cuts at home have fully taken hold.

Nowhere is the strain more evident than in China. Earnings there have slumped as domestic manufacturers take market share and the broader economy remains weak, turning what was once Volkswagen’s most important growth engine into an increasingly acute challenge.

Antlitz said the world’s largest car market has contracted by about 20% and that there is no stabilisation in sight. At the same time, Chinese manufacturers are pushing aggressively into Europe with lower-priced electric cars, intensifying pressure in Volkswagen’s home market even as its business in China deteriorates.

Porsche is another worry. The 911 maker is currently preparing a capital markets day for Oct 7, where it is expected to set out updated medium-term financial targets and strategy. Volkswagen said its writedown followed updated long-term planning and revised assumptions for Porsche’s valuation, suggesting the adjustment is linked to that process.

Volkswagen also said the faster-than-expected growth of EV sales in Europe is weighing on profitability, particularly at the Volkswagen passenger-car and Audi brands. Battery-powered models generally have lower margins than comparable combustion-engine vehicles, meaning the quicker shift in the sales mix is diluting earnings even as EV demand strengthens.

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