A China-Led Evs Push Leaves Volkswagen Behind

When Volkswagen AG launched its first factory in China four decades ago, there was almost no competition. Jeep had just arrived, and a few locals with names like First Auto Works and Second Auto Works, which largely specialized in big trucks and buses, had made a few forays into proletariat people movers like the East Wind and the Red Flag.

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As a result, VW's Santana—a boxy, no-frills sedan based on an early Passat model—quickly became the favorite form of transportation for ambitious business executives, political leaders, and, eventually, the burgeoning middle class. The German business quickly became the dominant brand in China, accounting for over half of VW's global revenue in various years.

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Volkswagen, like other international brands, was compelled to form joint-venture partners who would formally run the business, as part of a policy aimed at transferring design, engineering, and marketing expertise to local firms. (Now, Volkswagen has three: Shanghai, Jilin, and Anhui.) Those partners, as well as younger enterprises founded by former employees, have shown to be excellent students.

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Domestic automakers in China now dominate half of the market, up from a quarter in 2008. Volkswagen's sales have fallen by more than 10% this year alone, from 4.2 million vehicles in 2019 to 3.2 million last year. "The technical advancement gained in that nation is just extraordinary," VW CEO Oliver Blume remarked during the company's results presentation in March. "This is a significant task."

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Electric-Vehicle Sales in China

The fast expansion of battery-powered cars is hastening the trend, with EVs and plug-in hybrids on track to account for around 40% of China's vehicle deliveries by 2023. This has benefited BYD Co., China's largest EV manufacturer, which surpassed Volkswagen in passenger vehicle sales in the first quarter. BYD's profit more than quintupled last year to $2.4 billion, and the business is on track to become China's largest vehicle brand by December, ending Volkswagen's two-decade reign.

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Blume is in Shanghai for the Shanghai Auto Show, which begins on April 18. This is his third trip to China since taking over as CEO of Volkswagen in September. He's taking the company's board along this time to have a deeper picture of the issues Volkswagen confronts in its largest market.

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The manufacturer says it would showcase 20 EVs from its various brands during the event, as well as highlight collaborations aimed at building cars targeted to China. The all-electric ID.7 sedan, designed to cater to the Chinese demand for spacious vehicles, will be the star of VW's portfolio. Porsche AG will reveal VW Group's other show premiere in a different pavilion: a redesigned Cayenne SUV with a combustion engine (the all-electric version isn't due until 2026).

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While Chinese automakers have lagged behind global competitors in selling gasoline-powered vehicles, the government has promoted domestic EV champions by offering consumers incentives to purchase their vehicles. BYD, Nio, and Geely have profited from this endeavor, as have firms like CATL (Contemporary Amperex Technology Co. Ltd., the world's largest EV battery producer) and Ningbo Tuopu Group, which has manufactured components for Tesla and currently serves dozens of clients.

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"The Chinese push for electrification was primarily intended to level the playing field between incumbents and Chinese competitors," says Jefferies analyst Philippe Houchois.

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The business claims that it was able to bring its first model, the L7 SUV, to market in less than two years, which is less than half the time it took Volkswagen to begin production of its electric ID.3. VW said on April 18 that it will invest €1 billion ($1.1 billion) in a new research center in Hefei, reducing development time by nearly a third. "We have to get quicker," Volkswagen China CEO Ralf Brandstaetter remarked in February. "The market requires it."

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Domestic rivals have jumped ahead of Volkswagen in developing technologies thanks to China's expanding legions of software experts. Xpeng Inc. is focusing on self-driving technologies that it claims are superior to Tesla Inc.'s on Chinese roads.

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In addition, Nio Inc.'s coupes, sedans, and SUVs have Nomi, an animated dashboard robot with an animated face that can be programmed to entertain youngsters in the backseat by waving, winking, and making hilarious expressions. Voice commands can be used by parents to control the temperature or open windows.

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Volkswagen has been plagued by complaints about connectivity difficulties and displays that suddenly go dark—issues that the company admits and says it is attempting to resolve. "People regard Chinese brands as having a technology advantage," says Jing Yang, research director at Fitch Ratings in Shanghai. Yang, who owns a Mercedes-Benz combustion vehicle, says she is considering switching to an EV and is leaning toward a local brand since they have greater autonomous driving features.

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The emergence of domestic manufacturers has been aided by China's IT giants, which have invested more than $19 billion in car-related technology since 2021. Huawei Technologies Co. and search engine leader Baidu Inc. are developing self-driving tools and so-called smart-cabin features aimed at the safety and comfort of the driver and passengers. And Xiaomi Corp. is creating its automobile, with plans to begin full production next year.

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Volkswagen plans to respond by more than increasing its EV manufacturing capacity in China to 1 million vehicles per year by the mid-decade mark. The business says it plans to debut a half-dozen additional completely electric vehicles in the nation by 2025, with more than 30 by the end of the decade. Cariad, its software subsidiary, is collaborating with ThunderSoft, a local coding firm, to improve in-car gadgetry such as entertainment systems. It's also working on self-driving technologies with Horizon Robotics Technology R&D Co. in Beijing. In October, the carmaker announced a €2.4 billion joint venture with Horizon to produce semiconductors that will serve as the backbone of such systems.

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According to Jochen Siebert of Shanghai consulting company JSC Automotive, Volkswagen will need to drastically realign its China business toward EVs by delivering models that are as popular as its combustion cars. This was never going to be simple, and it's just growing more difficult as domestic competitors become stronger and create better vehicles.

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But, Siebert believes that Volkswagen, with its enormous cash flow and vast size, has as good a chance as anybody else of completing the transition. "Volkswagen has had its ups and downs," he says. "From a historical standpoint, they understand how to get out of it."

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