A trade war between Europe and China could slam the brakes on German car companies. The European Union's decision to impose tariffs on Chinese electric vehicles has angered China, which is expected to retaliate with counter-tariffs. This could be a major blow to German automakers, who rely heavily on China for sales. In 2023, nearly a third of their cars were sold there.

The danger zone for Germany lies in its luxury car market. While most vehicles sold in China are manufactured locally,many high-end models with bigger profit margins are shipped in from Germany. This makes them prime targets for retaliation. Porsche, for instance, exports all its cars to China, leaving it particularly vulnerable.

Analysts predict that counter-tariffs could focus on large-engine vehicles, a specialty of German brands. This could significantly reduce profits for German automakers, with estimates ranging from 4% to 10%. Some brands, like Porsche,might be able to raise prices to compensate, but this strategy has its limits.

The impact varies across German car companies. Porsche faces the biggest risk with a quarter of its sales coming from China and all its cars being imported. Volkswagen is less exposed, with only a small portion of its China sales relying on imports. However, any boycotts of German goods would still hurt the company. Mercedes and BMW also have a significant presence in China, with a sizable chunk of their sales coming from imported vehicles.

Other European automakers are not immune, but the threat seems less severe. Volvo and Stellantis have a smaller footprint in China. Ferrari, with a smaller market share in China, might be able to offset tariffs by raising prices on its luxury cars. Renault's operations in China are limited.

The situation remains uncertain. The nature of China's retaliation is yet to be determined, leaving German automakers in a wait-and-see mode, hoping for a peaceful resolution to the trade dispute.