Volkswagen (OTC: VWAGY) lowered its full-year revenue forecast on Friday, stating that the overall operating environment for the automotive industry is "extremely challenging."

The world's second-largest automaker now expects revenue for 2026 to be flat or down 3% compared to the previous year. This marks a revision from its prior forecast of flat to 3% growth. The company maintained its operating profit margin target range of 4% to 5.5%, and its guidance for operating net cash flow and liquidity remained unchanged.

Second Quarter Mixed Results

Volkswagen's second-quarter results were a mixed bag. Group total revenue increased by 2% year-on-year to 82.4 billion euros ($93.9 billion), driven primarily by price increases in its financial services division. However, vehicle sales fell by 9.7% to 2.04 million units, and production declined by 13.4% to just 2.01 million units.

Operating profit, which closely approximates earnings before interest and taxes (EBIT), fell 9.5% year-on-year to 3.47 billion euros ($3.96 billion). The operating margin declined to 4.2% from 4.7% in the same period last year.

CEO Acknowledges Persistent Headwinds

CEO Oliver Blume stated in a release, "We have strictly controlled costs to offset persistent negative factors amounting to tens of billions of euros. However, the overall environment in the automotive industry remains extremely challenging: geopolitical conflicts, trade disputes, stringent regulations, market volatility, and a comprehensive intensification of industry competition."

Net cash flow from the automotive business turned positive in the quarter, registering an inflow of 1.17 billion euros ($1.33 billion), compared to an outflow of 523 million euros ($596 million) in the same period last year. This cash flow improvement was largely attributed to reduced capital expenditure, lower tax payments, and timing differences in working capital receipts and payments.

Continued Pressure in the Chinese Market

Volkswagen's performance in China continues to be under pressure. Global deliveries fell by 8.6% in the quarter, with sales in China plunging 36.6% to just 424,300 vehicles. This contrasted with growth in other regions: North America (+7.7%), South America (+9.4%), and Europe (+2.5%).

Chief Financial Officer Arno Antlitz noted that the overall Chinese auto market contracted by 20% year-on-year and warned that competitive pressure in Europe is rising as Chinese automakers increase their exports.

External Challenges and Tariff Impact

Volkswagen cited US tariff barriers and strict global regulations as external factors squeezing the profits of European automakers. Blume highlighted that the three main drags on performance in the first half were US tariffs, one-off items, and weakness in the Chinese market.

Interestingly, the net impact of tariffs in the first half was actually a small positive, boosting earnings by 100 million euros. This was achieved as Audi and Volkswagen offset most of the costs through various tariff deductions and rebates.

Volkswagen's 2026 performance forecast assumes that current tariff policies will remain in place and that the geopolitical situation in the Middle East will not escalate further.

Brand-Level Profit Performance

By brand, Porsche's operating profit surged to 692 million euros ($789 million) from 154 million euros a year earlier. Commercial vehicle subsidiary Traton saw its profit rise to 902 million euros ($1.03 billion). Profit in the core passenger car segment, which includes Volkswagen, Skoda, and Seat Cupra, fell to 207 million euros ($236 million) from 234 million euros.

Restructuring Product Portfolio

The operational pressures are forcing Volkswagen to restructure its product portfolio, leading to the discontinuation of several models.

Volkswagen has launched a reform plan called "Future Plan," which includes 12 supporting measures aimed at long-term 2030 goals. The plan outlines a gradual reduction of up to 50% of its model lineup, concentrating resources on the most attractive market segments. It also involves a significant simplification of vehicle configurations, reducing the variety of interior versions and option packages by up to 75% to lower R&D and manufacturing costs.

Blume believes the second-quarter data proves the initial success of these reforms, citing a 12% increase in new car orders in Europe and a more than 50% increase in orders for fully electric vehicles. However, he also cautioned that Volkswagen is facing an unprecedented convergence of multiple risks.