- Europe’s flagship carmakers face collapsed profits, Russian energy cutoff, Chinese competition and a historic shift toward military production
- Mercedes-Benz CEO signals willingness to enter defense production as company posts 57% profit collapse in 2025
- BMW, Volkswagen and Porsche all record significant profit declines driven by Chinese competition, US tariffs and soaring energy costs
- Loss of cheap Russian natural gas has de-industrialized the German economy, sending it into a two-year recession
- German automakers’ combined market share in China has plummeted from 25% to just 13.1% in five years
- More than 55,000 automotive jobs cut in Germany in 2025 alone, with Bosch, ZF, Audi and Continental all slashing workforce
- Europe’s defense spending surge — €343 billion in 2024 — is opening a new revenue lifeline for struggling German manufacturers
- Porsche suffers most dramatic collapse with 92.7% drop in operating profit, while VW explores missile production at idle plant
Stuttgart, May 16, 2026 (Agencies) — Germany’s once-invincible automotive industry is facing its most turbulent period in decades, with Mercedes-Benz, BMW, Volkswagen and Porsche all reporting significant profit declines in 2025 even as a booming European defense market offers a potential lifeline. The crisis, driven by a perfect storm of Chinese competition, US tariffs, the loss of cheap Russian energy and a stumbling transition to electric vehicles, is forcing Europe’s most iconic car brands to fundamentally rethink their futures.
Mercedes-Benz fired the opening shot this week when CEO Ola Kallenius told the Wall Street Journal that the company is willing to move into defense production, provided it makes business sense. Kallenius stressed that the world has become a more unpredictable place and that Europe clearly needs to strengthen its defense profile. He framed any defense operations as a potential growing niche rather than a wholesale transformation of the company, but the signal was unmistakable — one of the world’s most recognizable luxury brands is actively exploring military contracts as a new revenue stream.
The timing tells its own story. Mercedes-Benz reported a staggering 57% drop in operating profits for 2025, with earnings collapsing from €13.7 billion to €5.8 billion. Revenue contracted by 9.2% to €132.2 billion. The causes are multiple and severe — approximately $1.2 billion in tariff costs imposed by the United States, a brutal price war with Chinese electric vehicle manufacturers, supply chain disruptions and unfavorable currency exchange rates. Sales in China, which accounts for nearly a third of all Mercedes car sales globally, fell 19% in 2025 alone. The company does not expect a return to double-digit profit margins until 2027 at the earliest.
Underpinning all of these pressures is an energy crisis that has fundamentally reshaped the German industrial landscape. For decades, Germany built its manufacturing dominance on a foundation of cheap and abundant Russian natural gas. Russia accounted for 55% of Germany’s gas imports as recently as 2021 — an extraordinary dependency that left Europe’s largest economy acutely exposed when Moscow invaded Ukraine in February 2022. Following the invasion and the imposition of Western sanctions, that pipeline of cheap energy was effectively severed. The end of cheap imported Russian gas has led to the deindustrialization of the German economy and sent the former powerhouse of Europe into a two-year recession. Germany was forced to replace cheap and plentiful Russian piped gas with far more expensive American liquefied natural gas, which became a massive financial burden on German and European industry alike. Economists advising the Berlin government had warned that an immediate embargo on Russian energy would send Germany into a sharp recession, with a potential loss of €220 billion — equivalent to 6.5% of annual economic output — over two years. That warning proved largely prophetic, and German manufacturers are still living with the consequences.
The shift toward defense is not entirely new for the Mercedes group. Its commercial vehicle arm, Daimler Truck, recently secured a contract to deliver hundreds of Mercedes-Benz Arocs logistics trucks to the German Bundeswehr, with deliveries scheduled through mid-2026. The company has also fulfilled military truck orders for NATO allies including Lithuania and Canada. The CEO of Mercedes-Benz Special Trucks described the Bundeswehr deal as a strong sign of confidence in the company’s technology in a challenging security environment. What is new is the open willingness to go further into dedicated defense manufacturing.
BMW, by comparison, has weathered the storm somewhat better than its German rivals — though its results remain deeply concerning. BMW’s operating profit in 2025 fell to its lowest level since the Covid pandemic, with earnings before interest and taxes dropping 11.5% to €10.2 billion. Net profit declined around 3% to €7.5 billion, while revenue fell 6.3% to approximately €133.5 billion. The automotive division was particularly hard hit, with its operating return on sales slipping to 5.3%, well below the 8-10% target corridor the company had set for itself. BMW sales in China fell 12.5% in 2025, though the company was somewhat cushioned by its large American factory, which produced around 413,000 vehicles, more than half of which were exported. BMW’s chief financial officer stated that without the tariff burden, the company would actually have reported an earnings increase in 2025 — underlining how much of the damage is externally driven rather than a product of competitive failure. BMW has not publicly signaled any interest in defense production, preferring to focus on its next-generation Neue Klasse electric vehicle platform as its path back to profitability.
Volkswagen finds itself in an equally difficult position, and its defense ambitions have been even more dramatic — if more controversial. The Financial Times reported earlier this year that VW was in discussions with Israel’s Rafael Advanced Defense Systems about converting its struggling Osnabrück plant to produce air-defense missiles. A company spokesman subsequently denied the report, but the fact that such conversations were reportedly taking place at all reflects just how seriously Germany’s industrial giants are eyeing the defense sector as a lifeline. VW announced plans to cut 35,000 jobs by 2030, representing a quarter of its German workforce, including 15,000 positions in Wolfsburg alone — a restructuring of historic proportions for a company that has long been seen as the backbone of German industrial employment.
Porsche’s collapse has been the most dramatic of all in percentage terms. The sports car maker reported a 92.7% drop in group operating profit in 2025, with earnings falling from €5.64 billion to a mere €413 million. Return on sales collapsed from 14.1% to just 1.1%. Extraordinary charges of approximately €3.9 billion — comprising €2.4 billion in product strategy realignment costs, €700 million in battery-related writedowns and €700 million tied to US tariffs — were the primary driver of the collapse. Porsche’s particular crisis stems largely from a failed bet on electrification. The company had originally targeted around 80% electric vehicle sales by 2030 — an ambition it has now dramatically scaled back. A new SUV planned to sit above the Cayenne will now launch with combustion and plug-in hybrid engines rather than as a full battery vehicle, and several all-electric models have been delayed as the company recalibrates to market realities.
The crisis extends far beyond the marquee brands and deep into Germany’s vast automotive supply chain. Robert Bosch, the world’s largest automotive supplier, announced plans to cut 13,000 positions at its mobility division on top of 9,000 already announced, seeking to close a €2.5 billion cost gap. ZF Friedrichshafen cut 7,600 jobs specifically in its electric powertrain division — a stark admission that EV parts orders are far below expectations. Audi announced plans to eliminate 7,500 jobs in Germany by 2029, while Continental reduced its global workforce by 7,150. In total, more than 55,000 automotive jobs were cut in Germany during 2025, with over 51,500 going in the first half of the year alone. The president of Germany’s automotive industry association summed up the mood bluntly, stating that Germany is experiencing a huge crisis as a business location.
German automakers’ combined market share in China declined from roughly 25% five years ago to just 13.1% in the first half of 2025, while domestic Chinese brands now control 68.8% of the Chinese market, led by companies such as BYD and Xiaomi. In electric vehicles specifically, German brands together hold approximately 5% market share in China — a humiliating figure for an industry that once dominated the world’s largest car market.
Europe’s defense spending boom, by contrast, offers a rare and growing source of optimism for German industry. EU member states spent €343 billion on defense in 2024, a 19% jump from the year before, with spending projected to continue climbing. Germany’s own procurement plan allocates $83 billion annually, with only 8% directed toward American systems and the bulk flowing toward domestic and European manufacturers. Domestic defense orders in Germany roughly doubled in the six-month period between 2025 and early 2026. Unions and economists are already calling for workers from the struggling auto sector to be retrained and requalified for growth sectors such as defense and industrial technologies. Rheinmetall, which began life as an automotive engineering company before transforming itself into Germany’s foremost defense manufacturer, has seen its stock surge dramatically since 2022 — and every struggling German carmaker is now watching that trajectory with considerable interest.
Any return to large-scale defense manufacturing by Mercedes-Benz carries significant historical weight that cannot be ignored. The company previously manufactured military hardware on a massive scale before and during World War II, supplying trucks and airplane engines to the Nazi regime from 1937. After Germany’s invasion of the Soviet Union in 1941, all vehicles produced by Mercedes went directly to the military. During that period, nearly half of the company’s 63,000 workers were forced laborers, prisoners of war and concentration camp inmates — a history the company itself acknowledges on its corporate website. Whether that history will generate public debate as the company edges toward defense production remains to be seen, but it lends the current strategic conversation a weight that goes well beyond balance sheets.
The broader European rearmament push has drawn sharp criticism from Moscow. Russian Foreign Minister Sergey Lavrov last month warned of the danger of EU militarization, describing it as happening very fast and frenetically. Russia has repeatedly stated it has no plans to attack European nations, while promising a strong response to any aggression directed at itself.
For now, Mercedes-Benz’s defense ambitions remain exploratory — a signal of intent rather than a firm commitment to specific contracts or product lines beyond its existing truck deliveries. But with Europe’s defense budgets at historic highs, German industrial capacity desperately seeking new revenue, the continent’s security environment more uncertain than at any point since the Cold War, and the economic wounds of the Russian energy cutoff still far from healed, the conditions for a deeper move into military production are arguably stronger now than at any point in the post-war era. Germany’s automotive giants built their dominance over a century. Whether they can reinvent themselves fast enough to survive the simultaneous collapse of their key assumptions — cheap energy, reliable Chinese demand and an uncontested technological edge — is the defining industrial question of the decade.