Volkswagen and the China Crisis: Is the Stock Cheap—or Just Discounted for a Reason?

Executive Summary

Volkswagen is losing significant ground in China. In the first half of 2026, group deliveries there fell by 25.9 percent. At the same time, pressure from Chinese manufacturers—who are no longer just catching up but setting the pace in areas like electric vehicles, software, and development speed—is intensifying.

For German investors, the Volkswagen preferred share still looks tempting: a price-to-earnings ratio of around 5.4, a price-to-book ratio of 0.2, and a calculated dividend yield of over 7 percent. However, this low price is no gift from the market. It is a quite clear calculation for falling profits, high investment needs, and the risk that Volkswagen's existing China business will lose value permanently.

China was long Volkswagen's second home

Volkswagen has been deeply rooted in the Chinese automotive market for decades. The brand enjoyed a reputation there that European competitors could only dream of: German, solid, high-quality, and reliable. Together with local partners, the group built an extensive production and distribution network.

This success model, however, relied on a market dominated by internal combustion engines where foreign brands were ahead in technology and brand image. These very conditions are currently disappearing.

China is today the center of electric and digital automotive development. Manufacturers such as BYD, Geely, Nio, XPeng, and other local providers bring new models to market in short cycles. They win with aggressive pricing, modern software, large displays, connected services, and driver-assistance systems specifically developed for Chinese customers.

Volkswagen isn't suddenly selling poor cars there. The problem is more unpleasant: the group is competing in a market whose rules are changing faster than its own organization.

The current figures are clear

In the first half of 2026, the Volkswagen Group delivered 4.13 million vehicles worldwide. This was 6 percent less than the same period last year. The decline in China is particularly severe: there, deliveries fell by 25.9 percent.

Other regions only partially cushioned the drop:

Europe: +3.5 percent
South America: +8.3 percent
North America: -3.1 percent
China: -25.9 percent

This shows two things. First, Volkswagen is by no means in freefall everywhere. In Europe, the group remains strong, and the order intake for electric vehicles has recently developed positively. Second, a decline of this magnitude in the world's largest automotive market cannot be easily offset by a few good months in Brazil or Germany.

The decline in China also impacts more than just sales. In an intense price war, margins, capacity utilization, and the returns of Chinese joint ventures are coming under pressure.

Revenue stable, profit quality weaker

At the group level, Volkswagen initially appears remarkably stable. Turnover over the past twelve months was around 320 billion euros. Compared to the previous year's period, however, this represents a decline of about 2 percent.

Significantly more problematic is the development below the top line:

EBIT margin: approximately 5.5 percent
Net margin: approximately 2.1 percent
Net profit for the past twelve months: approximately 6.6 billion euros
Decline in net profit: approximately 32 percent

For comparison: In 2023, Volkswagen reported a net profit of around 16.6 billion euros and an EBIT margin of just under 8.8 percent. While revenue hasn't collapsed since then, profitability has significantly eroded.

This is the critical point for investors. A car manufacturer can sell very many vehicles and nonetheless create little value for shareholders if discounts, development costs, restructurings, and low capacity utilization eat away at the margin.

Caution is also advised regarding free cash flow. On a twelve-month basis, the group's free cash flow was recently negative. Although one must distinguish between the industrial business and the financial services division—making the simple consolidated figure incomparable to that of a pure industrial company—it nonetheless illustrates how capital-intensive the restructuring is.

Volkswagen's response: "In China, for China"

The group has recognized the problem and attempted to fundamentally change its way of working. Under the motto "In China, for China," vehicles are no longer meant to be predominantly designed in Europe and subsequently adapted for the Chinese market. Instead, development, software, components, and decisions should take place more locally.

Volkswagen plans among other things:

30 new electrified models for China by 2027
shorter development cycles through local R&D
partnerships with Chinese technology partners, specifically for chips and driver assistance
more localized platforms and components
a product range tailored to Chinese customers

According to the company, development times have already been shortened by around 30 percent. This is important because speed has become a competitive advantage in China. While a German group still sorts out responsibilities, the Chinese competitor feels as though they are already configuring the next facelift. A bit exaggerated—but unfortunately not entirely far-fetched.

The strategy makes sense. However, it is no risk-free restart. More local development also means a stronger dependence on Chinese partners, local supply chains, and political frameworks. Simultaneously, Volkswagen must prevent the creation of parallel technology worlds for Europe, China, and North America from increasing complexity again.

Is the Volkswagen stock actually cheap?

At first glance, the answer is clear: yes.

With a recent share price of around 71 euros, the price-to-earnings ratio stood at about 5.4. The price-to-sales ratio was approximately 0.11 and the price-to-book ratio about 0.2. Additionally, there is a calculated dividend yield of around 7.4 percent.

Key Figure	Current Value
Share Price	approx. 71 €
P/E Ratio	approx. 5.4
Price-to-Sales	approx. 0.11
Price-to-Book	approx. 0.20
Dividend Yield	approx. 7.4 %
EBIT Margin	approx. 5.5 %
Net Margin	approx. 2.1 %

The problem: Low multiples do not automatically mean a stock is undervalued. They can just as easily signal that the market expects lower profits, high investment requirements, or weak returns on capital in the long term.

Volkswagen's current return on equity is only about 3.8 percent, with return on capital employed at approximately 4.2 percent. This is hardly convincing for a company forced to invest massive sums into factories, batteries, software, and new vehicle platforms.

The stock is therefore not simply "dirt cheap." It is a bet that Volkswagen will stabilize its margins, reduce investment requirements, and become more competitive in China again. If it succeeds, the low valuation offers significant headroom. If it fails, the low P/E may have merely been the market's polite hint to look closer.

What works for Volkswagen

1. Strong position in Europe Volkswagen remains a heavyweight in its home market. In the first half of 2026, deliveries in Europe increased, and the European order book for pure electric vehicles was more than 50 percent above the level at the end of 2025.

2. Broad brand portfolio With Volkswagen, Audi, Škoda, CUPRA, Porsche, Bentley, and other brands, the group covers numerous price segments. This breadth creates economies of scale and strategic options.

3. High liquidity in the automotive segment At the end of the 2025 fiscal year, the automotive division had a net liquidity of approximately 34.5 billion euros. This gives Volkswagen time to restructure.

4. Problems are recognized Local development in China, shorter product cycles, new partnerships, and cost reductions address the right issues. Whether implementation succeeds quickly enough is the more open question.

5. Low valuation The market does not currently demand a perfect turnaround. Even a stabilization of margin and cash flow could improve the perception of the stock.

What works against it

1. Chinese manufacturers set the standard Volkswagen must compete not only on price but also in software, user concepts, development speed, and local brand perception.

2. The price war can weigh down margins long-term Market shares can be defended with discounts. For shareholders, however, this is about as satisfying as a fully occupied restaurant that loses money on every meal.

3. The group remains extremely complex Many brands, platforms, holdings, factories, and co-determination structures make quick decisions difficult. This is a particular disadvantage in a period of major technological upheaval.

4. High capital requirements Volkswagen must simultaneously continue to develop internal combustion engines, expand electric vehicles, create battery capacities, improve software, and retrofit factories.

5. The dividend is not risk-free A high dividend yield looks attractive but is not a law of nature. If profits and cash flows remain weak for longer, the payout may come under pressure.

What German investors should watch now

The coming quarters should be evaluated less by individual sales records and more based on these points:

Do deliveries in China stabilize?
Do locally developed electric and hybrid models gain market share?
Does the operating margin improve toward the range of 4 to 5.5 percent mentioned for 2026?
Does the investment rate decrease as planned?
Does cost reduction actually result in free cash flow?
Does the net liquidity of the automotive division remain stable?
Can Volkswagen defend its strong position in Europe against Chinese competitors?

SmartDeer Assessment

Volkswagen is a classic case where a "cheap stock" and a "good company" do not automatically mean the same thing. The valuation is low, and the group possesses strong brands, industrial substance, as well as sufficient financial reserves. At the same time, the China figures show that a significant part of the previous success model is under pressure.

For long-term oriented investors, Volkswagen is therefore more of a turnaround play than a traditional quality stock. The potential returns do not come from worry-free growth, but from the hope that the group becomes faster, leaner, and more locally competitive.

The critical question is not whether Volkswagen can still sell cars. It can undoubtedly do so. Deciding factor is whether it earns sufficient money from these cars in the future—especially in China.

No investment advice. This contribution serves exclusively for information and analysis purposes. Key figures may change and should be checked against current corporate reports before making an investment decision.