Iconic auto giant may turn to its biggest rival for help

Big companies rarely admit they need a rival. They prefer to rebrand the problem, restructure a division, or roll out a new strategy with a vaguely inspirational name.

But every now and then, the math wins.

For most of the past 30 years, the German auto industry was the math. It built the cars, set the prices, and shipped the engines that powered Europe’s biggest economy. Wolfsburg and Ingolstadt felt less like cities and more like brand headquarters.

Then the price wars came.

I have been tracking the European auto sector for years, and the pattern is the same in every legacy market that gets disrupted. First, the incumbent blames the cycle. Then it blames tariffs. Then it blames the regulator. Then, only when the share price stops bouncing back, it blames its own cost base.

This week, Volkswagen (VLKAF) reached that final stage. The world’s second-largest carmaker reported a 14% drop in first-quarter operating profit and signaled, for the first time on a public call, that the fix could involve handing factory keys to a Chinese rival.

Volkswagen earnings miss exposes its China problem

Photo by CFOTO on Getty Images

Volkswagen profit miss puts the China problem on the front page

VW’s operating profit came in at €2.5 billion ($2.92 billion) for the first three months of 2026, down 14.3% from a year earlier and well below analyst expectations of nearly €4 billion, according to its Q1 2026 report.

Sales revenue slipped 2.5% to €75.66 billion. Global deliveries fell 4%.

Related: Volkswagen makes harsh decision to end EV production in U.S.

Two markets did most of the damage. China deliveries dropped about 20% in the quarter, while North America fell 9%.

The cost picture looks even worse. CFO Arno Antlitz said US tariffs introduced a year ago are now adding roughly €4 billion in annual costs to the group, reported Euronews.

CEO Oliver Blume’s response was unusual for a German auto boss. Rather than promise the cycle will turn, he told investors the structure itself has to change.

VW’s “current business model in the changed environment is not generating sufficient returns,” he said, per The Detroit News.

That is where the rival comes in.

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For most of the modern era, Volkswagen and BYD (BYDDY) have been on opposite sides of every important auto debate. Legacy versus startup. Combustion versus electric. Slow incumbent versus aggressive newcomer.

But on Volkswagen’s own earnings call, Blume floated a different idea. Sharing under-used European factory capacity with Chinese automakers could be a “clever solution,” he told analysts, per The Detroit News.

What that “clever solution” actually looks like emerged a day later. BYD is in talks with Volkswagen to take over part of the German automaker’s Transparent Factory in Dresden, reported Car News China.

The site has been mostly idle since VW stopped building cars there in 2025. Under the proposal being discussed, half of the factory would become a research hub run with the state of Saxony and TU Dresden. The other half would build BYD electric vehicles.

What struck me when I ran the numbers against VW’s own capacity disclosures is how far production has fallen behind. Pre-pandemic, the group was set up to build 12 million cars a year. Last year, it sold roughly 9 million.

That gap, three million cars of unused capacity, is not a temporary problem. Blume has called the idea of a return to pre-pandemic volumes “unrealistic.”

The capacity gap, in plain numbers:

VW Group was built to make 12 million vehicles annually before the pandemic, Carscoops reported2025 deliveries finished at 8.98 million, Topspeed reportedAround 50,000 German jobs are slated to disappear by 2030, The Detroit News reported

Selling or sharing a plant is cheaper than closing it. Industry bankers told Reuters individual sites could fetch between €100 million and €300 million each, per Investing.com.

Not everyone on Wall Street thinks the trade is wise. Bank of America’s Horst Schneider warned on the company’s earnings call that opening German factory doors to Chinese rivals risks letting in “a wolf in sheep’s clothing,” reported The Detroit News.

That fear has recent history behind it. BYD overtook Volkswagen as China’s biggest carmaker by sales in 2024 and held the title throughout 2025, reported Best Selling Cars Blog. VW only clawed back the top spot in early 2026 because Beijing rolled back EV subsidies, not because anything changed in Wolfsburg.

What it means for your portfolio and the cars you might own next

If you own a piece of any global automaker, this story is your story. Toyota (TM) and VW Group are the two largest carmakers in the world by volume, and the second-largest is now openly considering a rival as a partner. Anyone holding Ford (F), General Motors (GM), or Stellantis (STLA) exposure should pay attention to what comes next.

The basic playbook for legacy carmakers used to be simple. Build everything yourself, protect every plant, and let the brand do the heavy lifting. That is the playbook that produced VW’s 12 million vehicles of capacity and its 3-million unit hangover.

The new playbook looks different. Volkswagen is mass-producing its first car co-developed with Chinese partner Xpeng for the home market, per Team-BHP. It is exploring whether China-only models could be sold in Europe. And it may rent out half of a flagship German plant to the very company that knocked it off its perch in Shanghai.

For the consumer side of the equation, the practical takeaway is more interesting. If a deal at Dresden goes through, the BYD model parked in your neighbor’s driveway in 2028 may carry a “Made in Germany” stamp on the window sticker. That alone could shift how mainstream European buyers view Chinese EVs, which still sell at a brand discount despite better tech in many segments.

The shareholder math is murkier. VW’s stock trades at a P/E ratio of about 6.5 and a price-to-book multiple of just 0.23, per Investing.com. Cheap, by almost any historical measure. But cheap with a reason. Earnings before tax dropped 28.4% in the quarter, per Just Auto. Net earnings fell by the same percentage.

A shared-factory deal would not change those numbers overnight. It would, however, send a signal that VW management is willing to do the unthinkable to defend its margin.

In my analysis, that is the part of the story most investors will eventually price in. Companies that admit the old model is broken tend to bottom out before the ones that keep promising a rebound. VW just admitted it on a public call.

Whether that admission is enough to turn the stock around will depend less on press releases out of Wolfsburg and more on what Beijing, Berlin, and BYD’s board decide to do over the next few quarters.

The next milestone is May 5, when Audi reports detailed earnings. Watch closely.

Related: Volkswagen Gets a Big Boost in Its Fight Against Tesla

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