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Volkswagen has been getting a regular beating for a while now. They are accused of possibly profiting from forced labor in Xinjiang. And so, the German carmaker has been performing a balancing act of justification and profit-seeking for years, which hurts just to watch. But there is no need for showing pity. The sales in China help to stoically endure the constant moaning of Western critics.
But it is also painful for the observer to see how a German company has tied itself to China to the verge of losing control, but is obviously not as beloved by the customers in its “second home” as it had hoped in return. Example: The EV segment. Here, in this future growth market, Volkswagen is being increasingly pushed to the sidelines. Ouch.
Joern Petring went to the Shanghai auto show to see how CEO Blume attempts to reverse the persistent downward trend. The recipe includes a new, big car. But above all, more speed when it comes to decision-making and development.
Chinese competition is also putting increasing pressure on the heat pump industry. The Germans still belong to the important players. But competition is becoming fiercer in this growth sector, writes Christiane Kuehl, who therefore points to the solar industry’s debacle. There, too, German companies once stood at the top before state-subsidized manufacturers from China delivered the knockout blow.
Volkswagen is unlikely to suffer the same fate. The big Chinese partners profit too much from the legendary German car brand for them to want to wipe Volkswagen off the market. Chinese companies may be ruthless, but they are not stupid.
Volkswagen presented its new flagship electric model series, the ID.7, in Shanghai. After the German company launched its series of all-electric vehicles with models such as the ID.3 compact car and the ID.4 small SUV, the ID.7 is now set to enter the mid-size luxury class.
VW presented the new sedan on Monday not only on the eve of the auto show in Shanghai, but also in six other cities, including Berlin. However, the German company is betting primarily on buyers in its biggest market, China, which is the only place where the manufacturer already offers the large ID.6 SUV.
The Shanghai auto show will shine a spotlight on VW’s precarious position in the world’s largest car market. There, the Germans are facing more pressure than ever before. Because something has happened in China that observers have been warning about for years: Chinese brands are pulling ahead in the EV segment. Moreover, there are allegations of forced labor in supply chains from Xinjiang.
It can hardly be called a future market anymore. Electric cars are rapidly gaining market share. According to the consulting firm Automobility, pure electric cars and vehicles with hybrid drive (NEV) already accounted for 25.6 percent of car sales in China last year. In the first quarter of this year, 1.59 million NEVs were sold. That is 339,000 more vehicles than in the first quarter of 2022.
But VW – and the other German manufacturers – are practically irrelevant in the market. The Wolfsburg-based company was only able to sell around 30,000 NEVs in the first quarter, resulting in a market share of a meager two percent in the EV segment.
Chinese brands, on the other hand, are absolutely dominant. First and foremost is the Shenzhen-based BYD Group, which sold more than half a million NEVs in the first quarter – 80 percent more than in the first three months of the previous year. BYD thus holds a 38.8 percent share of the EV market. Tesla follows far behind with 10.5 percent.
Volkswagen will easily be able to compete with BYD at the Shanghai auto show. But VW has known for a long time where the problem lies: The Germans had problems meeting the customers’ tastes with some models. Chinese customers, for example, criticized the lack of special onboard software and entertainment functions that are often standard with domestic suppliers. The company is working on improvements here at full speed.
On the occasion of the Autoshow, VW CEO Oliver Blume also promised that the group would step up the pace: “In order for us to be able to use the dynamic growth and the high speed of innovation even more effectively, we are significantly accelerating our decision-making and development processes on site,” says Blume.
But will this pledge be enough? “German car manufacturers are now facing a massive headwind from domestic brands in China,” says car expert Stefan Reindl, head of the Geislingen Institut fuer Automobilwirtschaft. In terms of prices, Chinese vehicles are particularly attractive in the lower vehicle classes. But the Chinese are also closing in on the premium brands – at more affordable prices. Reindl assumes “that German manufacturers will continue to lose market share in China”.
Industry expert Ferdinand Dudenhoeffer also sees the Germans faced with big challenges. In March alone, sales of pure combustion vehicles fell by around one percent, while NEV sales rose by more than a quarter. According to Dudenhoeffer, the massive price war that is raging on the Chinese market is giving the Germans a hard time. “Tesla and the Chinese are ahead in the price and cost competition,” he says.
There is still good money to be made with combustion engines in China. “But if you don’t want to lose customers, you have to make significant price and margin concessions for electric cars,” says Dudenhoeffer. Western carmakers will have to recalibrate their production processes for electric cars, he says. Those who simply continue with the present price and production strategy will lose customers.
Will history repeat itself? After solar systems, another product of the energy transition is coming into focus: heat pumps. German and European manufacturers are internationally competitive and are growing rapidly. But the EU is registering a significant increase in competing products from China. And many components already come from the People’s Republic as it is. Are the emerging players in Germany doomed to meet the same fate as the German photovoltaic industry a good ten years ago?
Just as a reminder: The sector collapsed due to a flood of low-priced – state-subsidized – Chinese manufacturers. The German market share of around 20 percent worldwide virtually crashed after 2008. Many companies went bankrupt, and Bosch disbanded its solar division. The process showed how quickly a solid competitive position can be lost.
Most manufacturers are already dependent on imports from outside Europe for key components of their heat pumps. And that very often means China. The dependency mainly affects:
The Fraunhofer Institute estimates that the Chinese share of the German market for entire systems is about 20 percent. And in the EU, too, the demand is currently served mainly by European manufacturers. The European Commission puts its market share in the EU at 73 percent. Imports from China have increased in the past two years, writes the Brussels agency – but from a low level and against the background of an overall very rapid development. Therefore, the Commission assumes that European manufacturers will continue to lead and will still dominate 60 percent of the EU market in 2030.
The largest heat pump manufacturers in the People’s Republic include large household appliances manufacturers such as Gree, Midea and Haier. So far, China has primarily set its sights on Europe’s air-source heat pumps. In the first half of 2022, exports skyrocketed. More than seven times the volume went to Bulgaria alone, five times to Poland and three times to Italy.
The EU market is attractive because it is currently growing faster than any other region, at 35 percent. By 2030, annual sales could rise to seven million units, the International Energy Agency (IEA) expects – up from two million in 2021.
Germany is slower in the EU than, for example, Scandinavia. But the market is growing rapidly here as well. In 2022, around 236,000 heat pumps were sold in Germany, an increase of 53 percent over the previous year. The German government is now targeting annual sales of 500,000 units to achieve a field inventory of six million pumps.
German manufacturers generated around 2.8 billion euros in 2022. And they are counting on further growth, which is why they are expanding their capacities with multi-million investments. Vaillant increased its capacity by opening a mega-factory in Senica, Slovakia, by 300,000 heat pumps annually to well over half a million units. Viessmann, Europe’s second-largest manufacturer, plans to invest one billion euros in the expansion of its production by 2025.
But this technology is also booming in the People’s Republic: According to the IEA, around 13 million heat pumps were installed there in 2021. Its domestic manufacturers are generously subsidized, according to the Heat Pump Association – as are manufacturers in the USA, by the way. In Europe, too, the often small or medium-sized companies in this field are in dire need of direct subsidies, the association demands in a position paper. For Important Projects of Common European Interest (IPCEI), Brussels permits such direct subsidies by member states. EU-wide, the industry is to be promoted under the Net Zero Industrial Act in order to secure its competitive position – among other things, through fast approval procedures for new factories.
“We are in a delicate transition phase, where we have to constantly watch how the competitors are positioning themselves,” says Schreinermacher. “The fact that European heat pump manufacturers are technology leaders in some areas – especially in water-source systems – is currently an advantage.” But this advantage will not last because competitors from Asia and North America are catching up fast due to the local subsidies. It is clear that “the negative example of the photovoltaic industry is omnipresent”. No one wants it repeated.
Many compressors or their components already come from Asia anyway, or North America. “Every heat pump contains eight to ten different types of chips, for example for the central control,” Bjoern Schreinermacher, head of policy at the German Heat Pump Association (BWP), told China.Table. “These chips come from Asia for almost all household appliances, so also for heat pumps.” Many chips come from Taiwan. When asked by China.Table, the heat pump manufacturers did not want to comment on the exact suppliers.
There is a debate whether German industry should set up local production facilities for microchips – and if so, for which types of chips, says Schreinermacher. “In principle, however, sourcing differentiation is also possible for non-European imports.” There are signs that alternative suppliers have already been found outside Asia, the expert explains.
However, Schreinermacher stresses that it is impossible to build up an entire supply industry from scratch in a short period. But here, too, something is starting. “One option would be consortia that build something together.” But even with these projects, initial support is very important. Collaboration: Till Hoppe
The G7 states have issued a clear warning to China. In the event of any aggression against Taiwan, the People’s Republic will have to expect harsh consequences. The seven foreign ministers agreed on this at their meeting in Japan on Monday. The G7 will resolutely oppose any violent change of the status quo in the Taiwan Strait.
“We are certainly going to stand up against any coercion, any market manipulation, any efforts to change the status quo in the Taiwan Strait,” Reuters quoted an official from the US delegation as saying.
“Many of our partners in the region feel more and more that China increasingly wants to exchange the existing common binding international rules with its own rules,” said Germany’s Foreign Minister Annalena Baerbock. “China is pretending there are no rules even though it has ratified,” she added. During her visit to China, she already called a potential military conflict in the Taiwan Strait a “horror scenario“.
Baerbock said on Monday in Karuizawa, Japan, that many other examples showed how much the international order in the Indo-Pacific was at risk. It was therefore important that democratic and value-based countries stand together, she said.
The G7 includes Germany, France, Great Britain, Italy, Japan, Canada and the USA. Japan holds the presidency this year.
A Germany that increasingly strives to become independent of its economic partner China; a China that is more and more assertively pursuing its own path and is no longer really interested in cooperating with the West? Alexander Birle finds it difficult to agree with such assessments if they are made too generally. “The idea that the two countries are increasingly distancing themselves from each other has, after all, recently established itself as a kind of standard narrative. But the truth is much more complex,” he says.
Since January 1, 2023, the 53-year-old sinologist, historian and economist has headed the office of the Hanns Seidel Foundation in the western Chinese province of Gansu. Before that, he was active as an office manager in Beijing for eight years. The foundation, which is close to the German Christian Social Union party (CSU) and has been active in China since 1980, aims to promote constructive dialogue between Germany and China. And this continues to take place despite the much-cited mutual estrangement, as Birle emphasizes.
Birle gained his first China experience in 1997, back then as a DAAD scholarship holder at Shandong University in Jinan. “That was wonderful for me. I had the opportunity to learn the language and mentality really well.” After graduating in Germany, he initially worked for a few years as a freelance interpreter, translator, subject supervisor and language teacher. In 2008, he then joined the Institute for International Cooperation of the Hanns Seidel Foundation in Munich as a project coordinator, and in March 2014 he finally took over its office management in Beijing.
Birle’s responsibilities include conceptual planning, organization and management of dialogue and educational events. The main partner of Hanns Seidel Foundation is the Chinese Ministry of Education.
Of course, there are red lines on the Chinese side, such as Western criticism of human rights violations. Nevertheless, Birle thinks a confrontational course is the wrong approach. “Our goal is to give our Chinese partners the opportunity to critically reflect on their own position.”
This works quite well, he said, especially in the legal system, provided the red lines are respected. “In the area of public law and criminal law, Germany is considered a role model. There is a lot of interest, for example, in how we fight digital crime. Or how we structure criminal law for minors.”
This is the basis for a dialogue in which young Chinese scientists in particular can be sensitized to our value-based concepts, such as protecting the rights of young people who have committed crimes and successfully reintegrating them into society, explains Birle.
Birle sees himself as a facilitator of precisely these dialog spaces, which are important for counteracting economic and political alienation between the two countries. His ability to understand China’s view of the current geopolitical situation also helps him in this regard, he points out. “On the one hand, China has no interest in a new Cold War. On the other hand, there is – also for historical reasons – a strong desire to finally play a more important role again in global politics.”
Birle has set his sights high for the near future: As the new office manager in Gansu, he is responsible for the western and northern provinces, which are even more characterized by a lack of education compared to the east. In Inner Mongolia, for example, the Hanns-Seidel-Foundation has launched a scholarship program for socially disadvantaged young people.
“We can provide on a local level, far away from political meta-discourses of Western influence, socio-political impulses for the inclusion of disadvantaged people in the education system and the job market. This is a big help for enabling economic and social participation, which is gratefully accepted by the local people,” Birle explains. Klaus Lueber
Volkswagen has been getting a regular beating for a while now. They are accused of possibly profiting from forced labor in Xinjiang. And so, the German carmaker has been performing a balancing act of justification and profit-seeking for years, which hurts just to watch. But there is no need for showing pity. The sales in China help to stoically endure the constant moaning of Western critics.
But it is also painful for the observer to see how a German company has tied itself to China to the verge of losing control, but is obviously not as beloved by the customers in its “second home” as it had hoped in return. Example: The EV segment. Here, in this future growth market, Volkswagen is being increasingly pushed to the sidelines. Ouch.
Joern Petring went to the Shanghai auto show to see how CEO Blume attempts to reverse the persistent downward trend. The recipe includes a new, big car. But above all, more speed when it comes to decision-making and development.
Chinese competition is also putting increasing pressure on the heat pump industry. The Germans still belong to the important players. But competition is becoming fiercer in this growth sector, writes Christiane Kuehl, who therefore points to the solar industry’s debacle. There, too, German companies once stood at the top before state-subsidized manufacturers from China delivered the knockout blow.
Volkswagen is unlikely to suffer the same fate. The big Chinese partners profit too much from the legendary German car brand for them to want to wipe Volkswagen off the market. Chinese companies may be ruthless, but they are not stupid.
Volkswagen presented its new flagship electric model series, the ID.7, in Shanghai. After the German company launched its series of all-electric vehicles with models such as the ID.3 compact car and the ID.4 small SUV, the ID.7 is now set to enter the mid-size luxury class.
VW presented the new sedan on Monday not only on the eve of the auto show in Shanghai, but also in six other cities, including Berlin. However, the German company is betting primarily on buyers in its biggest market, China, which is the only place where the manufacturer already offers the large ID.6 SUV.
The Shanghai auto show will shine a spotlight on VW’s precarious position in the world’s largest car market. There, the Germans are facing more pressure than ever before. Because something has happened in China that observers have been warning about for years: Chinese brands are pulling ahead in the EV segment. Moreover, there are allegations of forced labor in supply chains from Xinjiang.
It can hardly be called a future market anymore. Electric cars are rapidly gaining market share. According to the consulting firm Automobility, pure electric cars and vehicles with hybrid drive (NEV) already accounted for 25.6 percent of car sales in China last year. In the first quarter of this year, 1.59 million NEVs were sold. That is 339,000 more vehicles than in the first quarter of 2022.
But VW – and the other German manufacturers – are practically irrelevant in the market. The Wolfsburg-based company was only able to sell around 30,000 NEVs in the first quarter, resulting in a market share of a meager two percent in the EV segment.
Chinese brands, on the other hand, are absolutely dominant. First and foremost is the Shenzhen-based BYD Group, which sold more than half a million NEVs in the first quarter – 80 percent more than in the first three months of the previous year. BYD thus holds a 38.8 percent share of the EV market. Tesla follows far behind with 10.5 percent.
Volkswagen will easily be able to compete with BYD at the Shanghai auto show. But VW has known for a long time where the problem lies: The Germans had problems meeting the customers’ tastes with some models. Chinese customers, for example, criticized the lack of special onboard software and entertainment functions that are often standard with domestic suppliers. The company is working on improvements here at full speed.
On the occasion of the Autoshow, VW CEO Oliver Blume also promised that the group would step up the pace: “In order for us to be able to use the dynamic growth and the high speed of innovation even more effectively, we are significantly accelerating our decision-making and development processes on site,” says Blume.
But will this pledge be enough? “German car manufacturers are now facing a massive headwind from domestic brands in China,” says car expert Stefan Reindl, head of the Geislingen Institut fuer Automobilwirtschaft. In terms of prices, Chinese vehicles are particularly attractive in the lower vehicle classes. But the Chinese are also closing in on the premium brands – at more affordable prices. Reindl assumes “that German manufacturers will continue to lose market share in China”.
Industry expert Ferdinand Dudenhoeffer also sees the Germans faced with big challenges. In March alone, sales of pure combustion vehicles fell by around one percent, while NEV sales rose by more than a quarter. According to Dudenhoeffer, the massive price war that is raging on the Chinese market is giving the Germans a hard time. “Tesla and the Chinese are ahead in the price and cost competition,” he says.
There is still good money to be made with combustion engines in China. “But if you don’t want to lose customers, you have to make significant price and margin concessions for electric cars,” says Dudenhoeffer. Western carmakers will have to recalibrate their production processes for electric cars, he says. Those who simply continue with the present price and production strategy will lose customers.
Will history repeat itself? After solar systems, another product of the energy transition is coming into focus: heat pumps. German and European manufacturers are internationally competitive and are growing rapidly. But the EU is registering a significant increase in competing products from China. And many components already come from the People’s Republic as it is. Are the emerging players in Germany doomed to meet the same fate as the German photovoltaic industry a good ten years ago?
Just as a reminder: The sector collapsed due to a flood of low-priced – state-subsidized – Chinese manufacturers. The German market share of around 20 percent worldwide virtually crashed after 2008. Many companies went bankrupt, and Bosch disbanded its solar division. The process showed how quickly a solid competitive position can be lost.
Most manufacturers are already dependent on imports from outside Europe for key components of their heat pumps. And that very often means China. The dependency mainly affects:
The Fraunhofer Institute estimates that the Chinese share of the German market for entire systems is about 20 percent. And in the EU, too, the demand is currently served mainly by European manufacturers. The European Commission puts its market share in the EU at 73 percent. Imports from China have increased in the past two years, writes the Brussels agency – but from a low level and against the background of an overall very rapid development. Therefore, the Commission assumes that European manufacturers will continue to lead and will still dominate 60 percent of the EU market in 2030.
The largest heat pump manufacturers in the People’s Republic include large household appliances manufacturers such as Gree, Midea and Haier. So far, China has primarily set its sights on Europe’s air-source heat pumps. In the first half of 2022, exports skyrocketed. More than seven times the volume went to Bulgaria alone, five times to Poland and three times to Italy.
The EU market is attractive because it is currently growing faster than any other region, at 35 percent. By 2030, annual sales could rise to seven million units, the International Energy Agency (IEA) expects – up from two million in 2021.
Germany is slower in the EU than, for example, Scandinavia. But the market is growing rapidly here as well. In 2022, around 236,000 heat pumps were sold in Germany, an increase of 53 percent over the previous year. The German government is now targeting annual sales of 500,000 units to achieve a field inventory of six million pumps.
German manufacturers generated around 2.8 billion euros in 2022. And they are counting on further growth, which is why they are expanding their capacities with multi-million investments. Vaillant increased its capacity by opening a mega-factory in Senica, Slovakia, by 300,000 heat pumps annually to well over half a million units. Viessmann, Europe’s second-largest manufacturer, plans to invest one billion euros in the expansion of its production by 2025.
But this technology is also booming in the People’s Republic: According to the IEA, around 13 million heat pumps were installed there in 2021. Its domestic manufacturers are generously subsidized, according to the Heat Pump Association – as are manufacturers in the USA, by the way. In Europe, too, the often small or medium-sized companies in this field are in dire need of direct subsidies, the association demands in a position paper. For Important Projects of Common European Interest (IPCEI), Brussels permits such direct subsidies by member states. EU-wide, the industry is to be promoted under the Net Zero Industrial Act in order to secure its competitive position – among other things, through fast approval procedures for new factories.
“We are in a delicate transition phase, where we have to constantly watch how the competitors are positioning themselves,” says Schreinermacher. “The fact that European heat pump manufacturers are technology leaders in some areas – especially in water-source systems – is currently an advantage.” But this advantage will not last because competitors from Asia and North America are catching up fast due to the local subsidies. It is clear that “the negative example of the photovoltaic industry is omnipresent”. No one wants it repeated.
Many compressors or their components already come from Asia anyway, or North America. “Every heat pump contains eight to ten different types of chips, for example for the central control,” Bjoern Schreinermacher, head of policy at the German Heat Pump Association (BWP), told China.Table. “These chips come from Asia for almost all household appliances, so also for heat pumps.” Many chips come from Taiwan. When asked by China.Table, the heat pump manufacturers did not want to comment on the exact suppliers.
There is a debate whether German industry should set up local production facilities for microchips – and if so, for which types of chips, says Schreinermacher. “In principle, however, sourcing differentiation is also possible for non-European imports.” There are signs that alternative suppliers have already been found outside Asia, the expert explains.
However, Schreinermacher stresses that it is impossible to build up an entire supply industry from scratch in a short period. But here, too, something is starting. “One option would be consortia that build something together.” But even with these projects, initial support is very important. Collaboration: Till Hoppe
The G7 states have issued a clear warning to China. In the event of any aggression against Taiwan, the People’s Republic will have to expect harsh consequences. The seven foreign ministers agreed on this at their meeting in Japan on Monday. The G7 will resolutely oppose any violent change of the status quo in the Taiwan Strait.
“We are certainly going to stand up against any coercion, any market manipulation, any efforts to change the status quo in the Taiwan Strait,” Reuters quoted an official from the US delegation as saying.
“Many of our partners in the region feel more and more that China increasingly wants to exchange the existing common binding international rules with its own rules,” said Germany’s Foreign Minister Annalena Baerbock. “China is pretending there are no rules even though it has ratified,” she added. During her visit to China, she already called a potential military conflict in the Taiwan Strait a “horror scenario“.
Baerbock said on Monday in Karuizawa, Japan, that many other examples showed how much the international order in the Indo-Pacific was at risk. It was therefore important that democratic and value-based countries stand together, she said.
The G7 includes Germany, France, Great Britain, Italy, Japan, Canada and the USA. Japan holds the presidency this year.
A Germany that increasingly strives to become independent of its economic partner China; a China that is more and more assertively pursuing its own path and is no longer really interested in cooperating with the West? Alexander Birle finds it difficult to agree with such assessments if they are made too generally. “The idea that the two countries are increasingly distancing themselves from each other has, after all, recently established itself as a kind of standard narrative. But the truth is much more complex,” he says.
Since January 1, 2023, the 53-year-old sinologist, historian and economist has headed the office of the Hanns Seidel Foundation in the western Chinese province of Gansu. Before that, he was active as an office manager in Beijing for eight years. The foundation, which is close to the German Christian Social Union party (CSU) and has been active in China since 1980, aims to promote constructive dialogue between Germany and China. And this continues to take place despite the much-cited mutual estrangement, as Birle emphasizes.
Birle gained his first China experience in 1997, back then as a DAAD scholarship holder at Shandong University in Jinan. “That was wonderful for me. I had the opportunity to learn the language and mentality really well.” After graduating in Germany, he initially worked for a few years as a freelance interpreter, translator, subject supervisor and language teacher. In 2008, he then joined the Institute for International Cooperation of the Hanns Seidel Foundation in Munich as a project coordinator, and in March 2014 he finally took over its office management in Beijing.
Birle’s responsibilities include conceptual planning, organization and management of dialogue and educational events. The main partner of Hanns Seidel Foundation is the Chinese Ministry of Education.
Of course, there are red lines on the Chinese side, such as Western criticism of human rights violations. Nevertheless, Birle thinks a confrontational course is the wrong approach. “Our goal is to give our Chinese partners the opportunity to critically reflect on their own position.”
This works quite well, he said, especially in the legal system, provided the red lines are respected. “In the area of public law and criminal law, Germany is considered a role model. There is a lot of interest, for example, in how we fight digital crime. Or how we structure criminal law for minors.”
This is the basis for a dialogue in which young Chinese scientists in particular can be sensitized to our value-based concepts, such as protecting the rights of young people who have committed crimes and successfully reintegrating them into society, explains Birle.
Birle sees himself as a facilitator of precisely these dialog spaces, which are important for counteracting economic and political alienation between the two countries. His ability to understand China’s view of the current geopolitical situation also helps him in this regard, he points out. “On the one hand, China has no interest in a new Cold War. On the other hand, there is – also for historical reasons – a strong desire to finally play a more important role again in global politics.”
Birle has set his sights high for the near future: As the new office manager in Gansu, he is responsible for the western and northern provinces, which are even more characterized by a lack of education compared to the east. In Inner Mongolia, for example, the Hanns-Seidel-Foundation has launched a scholarship program for socially disadvantaged young people.
“We can provide on a local level, far away from political meta-discourses of Western influence, socio-political impulses for the inclusion of disadvantaged people in the education system and the job market. This is a big help for enabling economic and social participation, which is gratefully accepted by the local people,” Birle explains. Klaus Lueber