The troubled European car market is dragging down Volkswagen, the region's leading car maker, as vehicle sales on the continent dropped to their lowest levels in decades.
The German maker Volkswagen has been buffered a bit more than other car companies in Europe because of its size and strong sales in North America and China.
But its shrinking profit margins reflect the industry's steep sales decline in Europe as well as intense competition in the biggest vehicle segments. Volkswagen joins a growing roster of car makers struggling in Europe, where car sales dropped 10 per cent during the first quarter, including double-digit falls in France, Germany and Spain.
VW chairman Martin Winterkorn said the company expected little improvement in Europe. "The coming months will be anything but easy," Mr Winterkorn said. "The current environment is definitely a tough challenge for the entire industry."
VW reported its after-tax profit fell 38 per cent to €1.95 billion ($2.5 billion) in the first quarter, even though revenue slipped just 1 per cent to €46.6 billion.
The Italian car maker Fiat also went into reverse, reporting an 88 per cent drop in profit in the first quarter to €31 million, on revenue down 2 per cent at €19.76 billion.
With the European market in a dismal state, most car companies are counting on surging sales in the US to generate future profits.
Fiat's chief executive Sergio Marchionne said a combination of pricing pressure and weak demand was likely to depress profits in Europe for some time. "Those who have claimed a Teflon approach are getting that coat taken off," he said.