Cost Cuts Hold Volkswagen Afloat as China Slump Deepens

Volkswagen managed to steady its financial performance in the first quarter, leaning heavily on aggressive cost reductions to offset weakening global demand and a sharp downturn in China. While revenues slipped and margins narrowed, the underlying picture shows a company relying more on efficiency than growth to stay resilient.

Revenue fell to €76 billion, down 2.4% year on year, driven by a 3.9% drop in vehicle deliveries. Stronger sales in Europe were not enough to compensate for weaker performance in both China and North America. Operating margin eased to 3.3%, reflecting softer volumes and rising cost pressures, landing below expectations.

Stripping out one-off restructuring charges and production adjustments, however, paints a more stable picture. Adjusted operating margin came in at 4.3%, comfortably within the company’s guidance range, supported by tighter cost control and internal efficiency gains.

Cost discipline proved to be the defining factor of the quarter. Savings of roughly €0.9 billion from overhead and fixed-cost reductions were enough to neutralize the drag from lower volumes, mix effects, and tariffs. In effect, cost cutting—not sales growth—became the engine protecting profitability.

China remains the weakest link. Deliveries fell 15%, while operating profit dropped sharply compared to the previous year. Although a wave of new models is planned to support recovery later in the year, the region is expected to remain under pressure in the near term.

Looking forward, Volkswagen is pushing an ambitious restructuring plan aimed at reducing cost per vehicle and aligning production capacity with softer demand. The long-term goal remains an operating margin of 8% to 10% by 2030, but achieving this will depend heavily on execution and market conditions.

The company is also betting on a major product offensive in China, with more than 30 new models expected by 2027 to regain lost ground. Still, current expectations remain below management’s long-term targets for both sales and profitability.

Despite ongoing headwinds, the valuation case suggests the stock remains moderately undervalued, reflecting persistent uncertainty—especially around China and global demand. The outlook points to gradual improvement rather than a quick turnaround, with recovery likely to unfold slowly and unevenly.