HEFEI, China: Volkswagen is attempting to reinvent itself within the nation that when powered its world success and the place it’s now preventing to remain related.
The German automaker has poured 3 billion euros (US$3.5 billion) into an unlimited analysis and growth hub in Hefei, central China, marking the most important abroad funding of its variety. The transfer underscores how dramatically the stability of energy has shifted on the earth’s largest and most fiercely aggressive auto market.
At its peak, Volkswagen commanded greater than half of China’s automotive market. Today, fast-moving home rivals and a speedy pivot to electrical autos have eroded that dominance, forcing the corporate to rethink the way it designs, builds, and sells vehicles in China.
For many years, international automakers succeeded by importing car designs from overseas and sharing know-how with native joint-venture companions. That mannequin has collapsed underneath strain from Chinese manufacturers that innovate sooner, lower prices aggressively, and cater carefully to native tastes.
“This business model is now gone,” Thomas Ulbrich, the chief know-how officer of the Volkswagen Group in China, mentioned.
Volkswagen started its strategic overhaul in 2022, acknowledging what Ulbrich describes as a paradigm shift. Instead of adapting world fashions for China, the corporate is now creating autos particularly for Chinese drivers. These fashions are unlikely to be offered in Europe, although some might attain the Middle East or Southeast Asia.
As these vehicles start to roll out, Volkswagen will be taught whether or not its China-first technique may also help it regain floor misplaced to home champions corresponding to BYD and Geely.
Such localization is crucial for staying aggressive, mentioned Rella Suskin, an fairness analyst at Morningstar who covers European automakers.
But she cautioned that “it will enable them to maintain market share levels in line with current levels, rather than allow them to regain the market share that has been lost over the last few years.”
The larger problem could also be profitability. China’s value wars have pushed margins so low that even main gamers are struggling to earn money.
Audi, a part of the Volkswagen Group, signaled a shift earlier this yr by launching a brand new China-specific model known as “AUDI,” spelled totally in capital letters. Volkswagen plans to observe with new 2026 fashions developed “in China, for China,” as the corporate places it.
“It’s a million-dollar question whether this strategy will pay off,” mentioned Claire Yuan, director of company scores for China autos at S&P Global Ratings. “We have to monitor, but I think they are on the right track to catch up in the race.”
Foreign automakers had been caught off guard by how shortly China’s market reworked. Electric autos now account for roughly half of recent automotive gross sales, and patrons count on cutting-edge digital options, from large contact screens to superior autonomous parking programs.
Vehicles that when outlined Volkswagen’s success, together with the Santana and Jetta sedans that dominated taxi fleets and first-time patrons’ garages, now not meet these expectations. China now accounts for about one-third of Volkswagen’s world gross sales, making adaptation crucial.
To survive, automakers should transfer at what has turn into referred to as “China speed,” mentioned Bill Russo, CEO of Shanghai-based consultancy Automobility.
Chinese EV makers sometimes convey new fashions to market in 12 to 18 months, in contrast with three to 5 years for world rivals. “The pace is not a choice but a necessity, and that pressure fuels global competitiveness,” Russo mentioned.
Ulbrich recollects working in northeastern China within the Nineties, when Volkswagen relied on imported elements as a result of native suppliers couldn’t meet its wants. Today, practically all elements are made and more and more designed in China.
To speed up growth, Volkswagen has shifted decision-making authority to its China operations. Other international automakers have taken completely different paths. Some have scaled again or exited, whereas Japan’s Toyota has additionally granted its China workforce better autonomy, giving them “unprecedented autonomy in product planning and development,” Yuan mentioned.
Volkswagen can also be tapping into China’s EV ecosystem, partnering with startup Xpeng to hurry up mannequin launches and develop its personal digital structure, the digital spine that controls car capabilities.
The technique displays a broader realization that innovation flows each methods.
“Knowledge flows are a two-way street between China and Germany,” mentioned Martin Hofmann, a Volkswagen government and chair of the German Chamber of Commerce in North China.
In a current chamber survey, about half of greater than 600 respondents mentioned they count on Chinese rivals to turn into innovation leaders inside 5 years, whereas 9 p.c mentioned they already are.