Goldman Sachs has downgraded two of Europe’s most prominent car manufacturers, Mercedes-Benz AG and Porsche AG, amid rising costs, shrinking profitability, and heightened challenges in the global automotive market. This move highlights the difficulties facing German automakers as they deal with weak electric vehicle (EV) profitability and declining earnings from key markets like China.

Rising Costs and Declining Chinese Profits Weigh on German Automakers

In a recent note, Goldman Sachs analyst George Galliers warned of a tough 2025 for the European automotive sector, particularly for German giants like Porsche and Mercedes. The firm downgraded Porsche from a “Buy” to a “Sell” rating, citing weak growth prospects and high financial risks. Galliers pointed to issues such as high leverage, the limited growth of battery electric vehicles (BEVs) in Western markets, and ongoing difficulties in China as key factors contributing to Porsche’s downgrade. Additionally, Porsche’s financial struggles, compounded by Volkswagen’s restructuring, have raised concerns about the company’s near-term outlook.

Mercedes-Benz also faced a downgrade, moving from “Buy” to “Neutral.” Goldman Sachs noted a 44% year-on-year decline in Mercedes’ car division earnings for 2024, with a further 14% drop expected in 2025. Concerns over the company’s luxury vehicle sales, particularly in key markets, as well as weakening contributions from China and the challenge of BEV profitability, contributed to the negative outlook.

Industry Challenges: Tariffs, Rising Production Costs, and BEV Profitability

Both companies are struggling with the increasing cost of BEVs, which remain unprofitable despite a rise in sales driven by stringent CO2 emission regulations. Goldman Sachs forecasts BEV penetration in Europe to increase from 14.3% in 2024 to 19% in 2025, but doubts whether these sales will be sufficient to offset the high production costs. In addition, the European Union’s recent tariffs on Chinese-made BEVs and the risk of escalating trade tensions add to the industry’s woes.

While the future remains uncertain for Mercedes-Benz and Porsche, Goldman Sachs identified potential opportunities for Renault. The French automaker’s cost discipline and a robust product pipeline could help it navigate the challenging market conditions more effectively than its German counterparts.