Volkswagen’s China Reversal: From Export Hub to Import Source as Tariffs Bite

VW's Q1 net profit fell 28% to €1.56B amid tariffs and Chinese competition, prompting a radical plan to cut jobs, slash models, and explore importing China-developed vehicles to Europe.

The German automaker that built its postwar fortune on selling European engineering to China is now preparing to do the opposite. Volkswagen is officially exploring the import of vehicles developed in the People’s Republic into European markets, marking a strategic pivot that would have been unthinkable just a few years ago. The shift comes as the company’s first-quarter results lay bare the scale of the damage from tariffs, Chinese competition, and underutilized factories.

The numbers tell a grim story. Net profit slumped 28 percent year-on-year to €1.56 billion, while revenue edged lower to roughly €75.6 billion. Operating profit fell to €2.5 billion, well short of the €4 billion analysts had penciled in, dragging the operating margin down to a wafer-thin 3.3 percent. Global deliveries slipped 4 percent to around 2.05 million vehicles in the opening quarter.

Two specific drags stand out. US tariffs alone cost the Wolfsburg-based manufacturer €600 million in the first three months. A further €500 million was swallowed by the decision to halt ID.4 electric vehicle production at the Chattanooga plant in Tennessee, where the company has switched back to building combustion-engine cars instead.

The pain is spreading across the group. Porsche’s profit dropped by nearly a quarter in the same period, and the Traton truck division also reported a significant earnings decline. In China, Volkswagen’s most critical market, sales tumbled 20 percent — or nearly 15 percent depending on the metric used — underscoring the depth of the challenge from local rivals like BYD.

CEO Oliver Blume is responding with a radical overhaul. The new “Target 2030” plan calls for slashing the model range by a double-digit percentage, cutting 50,000 jobs in Germany by the end of the decade, and reducing European factory capacity by an additional 500,000 vehicles. Annual production capacity is being pared back to 9 million units.

But the most eye-catching element is the rethink of Volkswagen’s global supply chain. For the first time, the company is openly considering bringing China-developed cars to Europe. Blume has floated the idea of sharing European plants with Chinese joint-venture partners such as SAIC, FAW, or Xpeng, and even manufacturing Chinese models under Volkswagen’s own roof. One analyst at Bank of America warned this could be a “wolf in sheep’s clothing,” inviting competition into the automaker’s own backyard.

For now, the immediate export priority for Chinese-built VW models remains the Global South — markets in Asia, South America, and Africa. A European launch is at least several years away and hinges on factors including tariff levels and logistics costs, Blume said.

The search for factory utilization is also taking Volkswagen into unexpected territory. Reports have emerged of talks with Israeli defense contractor Rafael about the Osnabrück plant. Blume ruled out weapons production but suggested military transport vehicles could be an option, with the concept potentially expanding to sites like Zwickau.

Despite the weak start, management is sticking to its full-year guidance. Volkswagen still expects slight revenue growth and an operating margin between 4.0 and 5.5 percent — but only on the assumption that current international tariff rates do not rise further. A bright spot came from free cash flow, which reached €2 billion in the quarter, offering some breathing room as the company navigates its most profound strategic shift in decades.