Volkswagen's core VW autos division said that EU requirements on curbing emissions and other climate-related demands would cause profitability to stall between 2018 and 2020.
Profits would be hit even as earnings, sales and deliveries at the German firm were forecast to hit new records this year, VW brand executives told a media briefing.
The European Union has proposed tougher vehicle emissions targets for 2025 and 2030 to reduce carbon dioxide (CO2) and other greenhouse gases. Carmakers, which are racing to develop electric vehicles (EVs), can be fined for violating the limits.
The VW brand shoulders the bulk of Volkswagen group's development spending, as well as costs related to the "Dieselgate" emissions scandal.
VW finance chief Arno Antlitz said VW faced "heavy financial demands" due to bottlenecks expected from introducing so-called WLTP lab tests related to car emissions and fuel consumption, regulations to curb CO2 emissions and EV development costs.
"The CO2 fleet targets will certainly pose the greatest challenge for us as a company until the year 2020," VW brand chief executive Herbert Diess said.
Carmakers are working on new EV models to meet emissions goals. VW aims to sell more than 1 million cars powered solely by batteries by 2025, after selling just 43,000 electric models in 2017.
The VW brand, Volkswagen's largest division by sales and revenue, more than doubled its return on sales to 4.1 percent on the back of cuts in research and development spending, lower production costs and rising sales of sport utility vehicles, which deliver higher margins.
The carmaker said its operating margin might come in between 4 and 5 percent this year, a range it said it would also maintain in 2020, the year before a new lower limit of 95 grams of CO2 per km takes effect.
"This year and over the next few years, the brand will face severe challenges despite its improved competitiveness," VW said.
But Diess said VW expected to benefit from further cost savings, expansion of modular production and growing demand for its new vehicle models in the Americas.
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