DRESDEN, Germany— Volkswagen will halt vehicle production at its Dresden plant this week, marking the first production shutdown at a German site in the automaker’s 88-year history. The decision comes as Europe’s largest carmaker faces mounting cash flow pressure from weak demand in China and Europe, as well as U.S. tariffs affecting American sales. The closure is part of a broader effort to reduce capacity and rein in spending as VW reassesses its €160 billion investment plan amid slower-than-expected electric-vehicle adoption and a longer runway for combustion-engine cars.

Opened in 2002, the Dresden factory produced fewer than 200,000 vehicles and most recently assembled the electric ID.3, having previously served as a showcase for VW engineering with the Phaeton luxury sedan. Company executives said the move was economically necessary and aligned with an agreement with unions that includes 35,000 job cuts in Germany. The site will now be repurposed into a research campus focused on AI, robotics, and semiconductor development in partnership with the Technical University of Dresden, with VW committing €50 million over seven years while retaining limited use of the facility for customer deliveries and tourism.