In 1978, a Chinese delegation dressed in Mao suits traveled to Wolfsburg with a startling message to the men driving Volkswagens: Deng Xiaoping’s China was open for business.
Now, after four decades of building the world’s largest auto market from scratch and capitalizing on the rise of an economic superpower, the automaker suddenly found itself fighting for its position in China.
While the vast German group, which today includes Porsche and Audi, sells more cars in China than any other company, its flagship VW the marque was recently dethroned as the country’s best-selling car by BYD, the Shenzhen-based conglomerate backed by Warren Buffett.
The German company lags behind in the fast-growing electric car segment, where the VW brand sits in ninth place with a market share of just 2%. BYD, which holds the number one spot, has nearly 40%, and Elon Musk’s Tesla, in second, has more than 10%.
Chinese EV makers, which include plug-in hybrid and battery-powered cars, dominate their own market and are aggressively expanding overseas as well. China overtook Germany in auto exports in 2022 and is set to eclipse Japan as the world’s largest auto exporter this year.
VW, one of Germany’s largest and most prestigious companies, depends on China for at least half of its annual profits, which reached 22 billion euros last year. Its position in the race for EV market share is jeopardizing the future security of those gains.
Despite this backdrop, VW executives still haven’t appreciated the threat they faced in China, a Shanghai-based adviser to the German group said.
“Many people at Volkswagen have worked there all their lives; I don’t think they can imagine that Volkswagen doesn’t exist. That’s actually what’s at stake right now,” they added.
VW said profitability mattered more to the company than volume. “The quality of the business takes precedence over the quantity,” she said.
The company reported better-than-expected sales for the first quarter last week, driven by Europe and North America. But in China, deliveries fell by 15%. VW said it was confident its new model range and “China-specific technology” would help sales recover in the latter part of the year.
Geopolitics further complicates the outlook for the company. Germany, which has been forced to come to terms with its dependence on Russian gas following Russia’s full-scale invasion of Ukraine, is concerned about its economic dependence on China under President Xi Jinping.
Annalena Baerbock, the German foreign minister, said after a brief visit to Beijing in April that China was becoming a “systemic rival”.
At the same time, VW risks angering Beijing by responding to mounting Western pressure over human rights abuses in Xinjiang, the site of one of its smaller factories.
That hasn’t slowed VW down: In the last year alone, it has announced investments in China of nearly 4 billion euros. Last year the company moved Ralf Brandstätter, board member responsible for China, to Beijing to work in “close cooperation” with its top three joint venture partners, Chinese state-owned auto companies FAW, SAIC and JAC.
VW’s new strategy is billed as “in China, for China,” a plan to locate production in the country as a way to hedge against supply chain shocks and deepening divisions between the West and China.
When Brandstätter took the stage at the Shanghai auto show last month, he didn’t address the worsening geopolitical climate but instead tried to answer how the company intends to win back customers.
A new €1 billion innovation center would build on the €2.4 billion investment in Horizon Robotics, a Chinese chip design company, announced late last year, Brandstätter said. VW’s software arm Cariad would also double its engineers in China to 1,200.
The multibillion-dollar spending plan would cut the time spent on product development by nearly a third and give more autonomy to local decision-making, he added.
“The needs and requirements of Chinese customers are different from those in other regions of the world,” said Oliver Blume, chief executive of VW, standing next to Brandstätter at the auto show wearing starch-white sneakers. “It is very important that all our developments are very close to the customers.”
But among industry consultants, analysts and former VW employees, there is skepticism about the automaker’s Chinese plan.
Decisions on design and engineering issues are locked between Wolfsburg and the group’s many Chinese offices and plants. VW cars are developed in Germany for European customers before the models are modified to become Chinese-made for Chinese consumers.
For years this arrangement posed few problems. US and Japanese rivals have followed suit, and Chinese consumers have rewarded anything foreign. Yet today it has left staff hamstrung and helpless as their Chinese rivals unveil smart driving technologies and new EV designs.
According to a former VW executive, who left the company in recent years to join a major Chinese EV maker, the company was paying the price for being conservative on EVs while other groups “tested the waters.”
Now, as it looked to transition into electric models, VW remained “heavily dependent” on major suppliers that made parts for internal combustion engines, the former executive said. That meant it had fallen behind not only Chinese rivals but also Tesla, which was becoming deeply enmeshed in the local EV supply chain, they added.
“Volkswagen is a fuel-powered vehicle giant. . . It’s like asking an elephant to turn around,” the former executive said.
The Shanghai-based VW consultant said his Chinese team was also suffering from an outdated software platform for new vehicles.
“They can offer beautiful cars even with an electric battery, it’s not a problem at all, but the software is so outdated, it’s just embarrassing,” he said.
“Maybe for Europe it’s good enough for a few more years. This will very quickly lead to a dead end for China. If they can’t fix that, they’re going to have a ‘hole’ in new product launches for maybe a year or two, which can really kill a company,” he added.
VW’s joint venture commitments in China pose another problem.
Spurred by Tesla’s pledge to build electric vehicles in Shanghai, Beijing in 2018 lifted restrictions on foreign ownership of automakers. But analysts said VW and other foreign groups were afraid of upsetting their longtime JV partners and the lucrative business they’ve generated.
“They’ll keep milking the cow, but the cow won’t survive much longer,” said Bill Russo, the former head of Chrysler China and founder of the Shanghai-based consultancy Automobility.
Fears of angering Chinese partners and officials also complicate the future of the company’s Xinjiang plant, the western region where the state has committed widespread human rights violations against Uyghurs and other Muslim groups.
VW has ruled out the factory closure. He has dodged pressure from politicians, human rights activists and his own union, arguing that he must honor his contract with partner SAIC despite having already abandoned plans to use the plant for the production of a new model.
In an internal memo in February, Brandstätter told employees he had made his first visit to the Xinjiang factory, citing “deep concern” over reports of human rights violations.
While the memo did not address allegations of human rights violations at the plant, Brandstätter said the factory was “upscale overall”. He described a separate canteen exclusively for halal dishes and a “learning island” where workers can study the Uyghur language.
Even as VW’s operations in China are under pressure, fast-growing Chinese companies like Li Auto, Xpeng and Nio are pushing their mass-market cars ever closer to self-driving functionality.
The former VW executive in China said the company was too “slow to understand” how tech-focused Chinese consumers had become, which has led to a large gap between the services and features offered by Chinese vehicle makers electric and those available in the The cars of the German group.
“It’s like comparing iPhones to Nokias 10 years ago.”
Additional reporting by Nian Liu in Beijing
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