Volkswagen AG: The market’s doomsday view on European mobility

Table of Contents

1. Executive Summary
2. Intro: Volkswagen AG Basics
3. Initial situation: The market’s doomsday forecast
4. The historical threat from China
   1. Competitive advantages of Chinese all-electric OEMs
      1. Vehicle architecture and software
      2. Design-to-cost approach: excessive focus on cost efficiency
      3. High value added and optimized supply chain
      4. Low labor costs
      5. Economies of scale through mass production
      6. Government subsidies
   2. Result: China with an ex-works cost advantage of approximately 30-40%
   3. What’s next? Possible effects of the cost disadvantage
      1. Europe and the rest of the world
      2. China
5. Further challenges and headwinds for VW
   1. EU CO2 limits and possible penalties
   2. High and rising costs, overcapacity, and low efficiency
   3. Potential punitive tariffs on imports to the US
6. Impact on profit and cash flow in the “business as usual” scenario
7. Volkswagen’s automotive business: Quo vadis?
   1. High-level performance targets of the VW Group
   2. Strategic and operational countermeasures taken by the Executive Board
      1. Model offensive from 2025/26
      2. “In China, for China” strategy
      3. VW: Savings in the range of >EUR 15 billion per year
      4. Savings at Audi and Porsche
      5. Setting up in-house battery production
   3. Enablers of efficiency gains and cost reductions
      1. Uniform vehicle architecture for all vehicles (except China)
      2. Development of market-specific software architectures
8. Assessment of measures and implications for margin and cash flow
   1. Aggregated view of future EBIT for the automotive division
   2. Implementation of measures and scenario analysis
   3. Resulting sustainable cash flow
9. Deep dive into financial services
   1. Organizational structure of the Financial Services Division
   2. Key figures
   3. How the business model works
   4. Valuation of the Financial Services segment
10. Bringing it all together: Valuation scenarios and key takeaways
11. Potential price drivers/catalysts
12. Disclaimer
13. Further resources
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Executive Summary

Market valuation significantly below net asset value: Despite positive earnings and cash flow figures, the automotive business is valued at almost zero by the market.

The current market valuation of Volkswagen AG is difficult to reconcile with the Group’s financial fundamentals. Despite an operating profit of EUR 15.9 billion and free cash flow of ~EUR 5 billion in 2024, the implied market value of the automotive business – based on a valuation of the financial services division at book value – is only ~EUR 0–5 billion.

Competitive pressure from Chinese manufacturers is increasing: Chinese OEMs have significant cost and technology advantages.

The increasing market penetration of Chinese all-electric OEMs in Europe and structural cost advantages (including vertical integration, subsidies, and BEV-optimized platforms) are increasing competitive pressure. According to various sources, the cost advantage over European manufacturers is 30–40%.

Additional external and internal challenges are weighing on earnings: CO₂ targets, structural overcapacity, and geopolitical risks are leading to earnings risks.

In addition to competitive pressure, stricter CO₂ targets, possible punitive tariffs on US imports, and structural efficiency deficits (high overheads, rising personnel costs, underutilization of European plants) are having a negative impact on earnings development.

The base scenario shows a sharp decline in earnings until the end of the decade: In the “no countermeasures” scenario, earnings are expected to be zero in 2029.

Under conservative assumptions, the combination of market share losses, cost increases, and regulatory requirements will result in EBIT close to zero in 2029 for the automotive business. The main drivers are BEV-related margin pressures, declines in China and additional costs from punitive tariffs.

Group management responds with comprehensive package of measures: Cost reductions, new platform strategies and regional partnerships are intended to remedy the situation.

The planned countermeasures include savings of >EUR 15 billion per year, the introduction of the SSP platform from 2028, the “In China, for China” strategy, and the establishment of in-house battery production. In addition, a modular software architecture is planned. The implementation of these measures will be crucial to success.

Market price currently reflects a high degree of skepticism: The current valuation assumes that the measures will have little effect.

The low valuation of the Group implies that the capital market does not currently expect the transformation measures to be successfully implemented. At the same time, it should be noted that if a large part of the planned measures take effect, there is significant valuation and earnings potential.