When it comes to the competitiveness of Germany’s big car manufacturers, bad news has almost become the norm. Volkswagen, in particular, faces persistent criticism: too slow, structurally inflexible – but then again, morally far too flexible as far as the plant in Xinjiang is concerned. These are the accusations. Against this backdrop, the outlook of automotive market expert Ferdinand Dudenhoeffer on this traditional company is surprising. He praises the company’s reputation, strong brand, strong investments, and new partnerships – such as the one with Xpeng, which is supposed to shorten development times.
And despite the debate about human rights violations and excessive dependence on the People’s Republic, Dudenhoeffer is convinced that Volkswagen should not withdraw from China, but rather strengthen its position there.
Christian Domke-Seidel’s analysis provides the context for the transformation the German company is currently undergoing. He is also cautiously optimistic about the – slow – transformation of the company. Even though the world has changed rapidly: After all, the German car manufacturer suddenly must cooperate with companies that had to cooperate with VW a few years ago.
Numbers don’t lie, and they look good for Volkswagen in China. Last year, the company sold 3.2 million cars in the People’s Republic. Most of these – around three million – were cars with combustion engines and made a profit. However, the German company is increasingly falling behind in electromobility. An investment offensive is intended to change this. The necessary transformation is starting slowly, but at least it is underway.
Together with its joint ventures, the German company sold 1.6 percent more vehicles last year than in the year before. In the non-electric car segment, Volkswagen even increased its market share from 19 to 20 percent. Even EV sales are not as low as the reports suggest. 200,000 cars represent an increase of 23 percent.
But it all depends on the context. Volkswagen grows slower than the market. The EV market grew by 24 percent, and the New Energy Vehicle (NEV) segment, which also includes hybrid drives, grew by as much as 38 percent. Extrapolated to the overall market, this resulted in a growth of 5.6 percent. The fact that VW gained market share is attributable to the shrinking market for combustion engines, which lost around 6 percent, according to calculations by the Chinese Passenger Car Association (CPCA).
This did not happen by chance, as Stefan Bratzel explains. He is the founder and director of the Center of Automotive Management (CAM). “The situation in China is also related to the diesel scandal and the subsequent transformation. After 2015, VW was very focused on itself and had to take care of its European and US business. Then Covid hit. For years, China was not the focus of the company’s executives. They simply didn’t recognize the speed and innovation in the Chinese market.”
Volkswagen rightly concluded that it must react now and advance the transformation from a strong position.
At the end of last year, VW’s top management decided on a ten billion euro austerity package. The aim is to sustainably reduce the number of employees to increase the margin at the core brand. However, Volkswagen’s enormous investment plan, already approved in 2022, remains untouched. 180 billion euros are to improve the company in key areas by 2028. Two-thirds of the money is earmarked for electrification and digitalization.
China has an important role here. Volkswagen has massively expanded its production, development and innovation hub in Hefei. “This enables us to customize our products even faster to meet the needs of Chinese customers. In a dynamic market environment, a high pace of development is crucial for competitiveness,” Ralf Branstaetter, Volkswagen AG Board Member for China, commented on the move.
Chinese customers are very price-sensitive, Brandstaetter said during the announcement of the investments. The result is an almost destructive discount battle in the car market. This makes it crucial for Volkswagen to reduce costs and offer affordable cars.
Specifically, Volkswagen China Technology Company (VCTC) is developing an electric platform for the entry-level segment. The electric drive kit will be based on Volkswagen’s modular system. This could take new EVs from the concept stage to production readiness within 36 months. This is why the cost-cutting measures left VCTC untouched. On the contrary. When the platform goes online in 2026, it is expected to employ around 3,000 people. All developments and decisions relating to vehicles destined for the Chinese market come together at VCTC.
All of this is ambitious. However, the Chinese market is highly competitive. “VW will never regain the position it once had in China – i.e., being the big market leader. The Chinese manufacturers are too strong in next-generation technologies for that. VW must focus on maintaining its current strong position,” says Bratzel.
Volkswagen also further expands its management team in China. Thomas Ulbrich will take over as Chief Technology Officer China on 1 April 2024 and thus also become CEO at VCTC. He most recently served as a Board Member for New Mobility at VW. Within the company, Ulbrich is considered a proven development and software expert and has already held two management positions in China. His task is to advance localization (keyword: “in China, for China”) and networking.
“VW has sent Ralf Brandstaetter and now Thomas Ulbrich to China to have good people with a certain amount of clout there. The background to this is that VW wants to utilize the experience, speed and processes that exist in China as a blueprint for Europe,” Bratzel comments on the personnel decision.
Success will probably also be measured by whether and how well the various projects and investments can be harmonized. In addition to the well-known joint ventures SAIC Volkswagen, FAW-Volkswagen and Volkswagen Anhui, these also include the companies Gotion (battery) and the software unit Cariad. The integration of partners from Horizon Robotics (autonomous driving), ARK (user experience) and Thundersoft (infotainment) is also crucial for the company’s future.
Earlier this year, Anhui Automotive started manufacturing the Cupra Tavascan for export to Europe. A model for the Chinese market will follow later this year. Volkswagen’s investment in the Chinese EV pioneer Xpeng has also caused a stir. In exchange for 700 million dollars, the German company gained around five percent of the company, a seat on the board of directors and, a partner with whom two new electric cars are to be developed for the Chinese market. “With XPENG, we now have another strong partner that is one of the leading manufacturers in China in key technology areas,” Brandstaetter commented on the deal last year.
However, Bratzel also sees a bit of irony here: “In this catch-up process, VW suddenly finds itself cooperating with companies that had to cooperate with VW just a few years ago.”
Mr. Dudenhöffer, what do you know about how Volkswagen is currently doing in China?
Sales figures have significantly picked up again. With China boss Ralf Brandstaetter, Volkswagen is forging ahead in the Chinese market. Incentives such as price discounts certainly play a role here. But the important thing is that VW is stabilizing its market position. And what VW has planned – the new research and development center with the Chinese joint venture partner in Anhui, for example, or the cooperation with the Chinese car manufacturer Xpeng – I think is very promising. In my opinion, VW has made significant strides in China over the last twelve months. And you can now see that bit by bit.
VW seems to be in a dilemma. Combustion cars are selling very well – they make up a significant proportion of VW’s global sales. But when it comes to the transformation to electromobility, VW is clearly behind its Chinese competitors.
Everyone is lagging behind the Chinese, including Tesla. For VW, this has two reasons: the newly developed models, the ID family, have found little favor with Chinese customers. The models were not playful enough compared to the Chinese competition. And prices were relatively high. Both have now been adjusted. VW has recognized that the new cars need to have much more Chinese flair. Changes take time, you can’t make them in twelve months.
However, Volkswagen is still outclassed by its Chinese competitors, particularly in EV technologies like batteries and software. Can the gap be closed?
Absolutely. The decision to cooperate with Xpeng was important because Xpeng has the smart cockpit covered. And VW is in the process of becoming more Chinese by setting up a large development center in Anhui. Working closely with Chinese developers is particularly important in the software sector. In the battery sector, the Volkswagen subsidiary PowerCo is currently setting up battery plants for VW in China in cooperation with Guoxuan. When we look at the market today, we look at yesterday’s picture. The picture of tomorrow looks more positive.
There are currently over 150 EV manufacturers in China. Only a handful will probably survive. What makes you so sure that VW will be among them?
VW has a strong past, continues to enjoy a strong reputation and customers trust the brand. And: VW is investing heavily. There is a strategy whereby the cars are not developed in Wolfsburg but in China, i.e., in cooperation with Chinese companies. And they have found good cooperation partners. Volkswagen is working with Horizon Robotics, one of the leading AI specialists, so that the company can also catch up in terms of software. A new beginning can be seen at VW. In five years, we will know whether this is very successful or more of a medium success. But the direction is right.
But will that be enough? The big competitor is BYD, which knocked VW from first place in China last year. BYD needs less than 18 months to get a new model ready for the market, while VW needs over 40. Can the Germans keep up with that?
That’s why VW is developing its new models in China and no longer in Wolfsburg. And things are moving faster there with partners like Xpeng. BYD is a competitor that should be taken very seriously. But BYD will not be the only one selling electric cars in China and worldwide. There is SAIC, Great Wall, Geely – it’s a race for the future. What VW is currently doing in the battery sector is not yet at BYD’s level, but it does show exciting approaches.
In a transformation like the current one from the combustion engine to the electric car, newcomers such as Tesla have it easier than traditional manufacturers because they don’t have to lug around a huge apparatus with a large workforce that was hired for the old technology. How much of an impact will these legacy issues have on Volkswagen’s transformation in China?
BYD is not a newcomer either, but has also built combustion cars. However, BYD decided a year and a half ago to only build electric cars and plug-in hybrids. BYD is obviously also capable of this transformation. Yes, newcomers like NIO, Xpeng and Li Auto have an edge. But VW’s experience in the car business should not be underestimated. Customer relationships, for example, how to connect intermediate products in the long term. Nobody wants product recalls. You can also see that with Tesla, how certain things have only been improved and learned over time. But as I said, BYD is not a newcomer either, but it has quickly made the transition to electric cars.
Then there is the debate about the Xinjiang plant: BASF has announced its withdrawal from the province. Now, VW is also under massive pressure. How do you think VW should proceed?
That is difficult. BASF is a supplier in the chemicals sector. VW, on the other hand, is much more in the public eye in the end customer market. As far as I can tell, VW has already ensured that human rights and working conditions at its own plant are meticulous. To sell the plant overnight or even close it down would be a considerable entrepreneurial risk. Such a withdrawal would not only alienate the political elite in China, but also many Chinese customers.
And yet there is growing evidence that Uyghur forced laborers were involved in the construction of a VW test track, for example. Surely VW cannot ignore this?
I can’t pass judgment because I don’t know the situation on the ground. But we should be careful not to run around the world pointing fingers. I agree with former German Chancellor Helmut Schmidt, who once said that Germany is not the world’s moral teacher. What VW should do is commission auditors to assess the situation independently. If they can prove that there have indeed been human rights violations, consequences must be drawn.
Human rights organizations criticize that such independent audits are not even possible in an authoritarian country like China.
These organizations raise whether we can cooperate with China at all.
And?
I’ll stick by the words of Helmut Schmidt.
A debate about de-risking from China has long been raging in German politics. Can VW, with its holdings in 35 plants, become more independent of China?
Just like BMW does, just like Mercedes or Toyota do: VW must strengthen its position in China. Because without the Chinese market, you are no longer in the car business. Future innovations are coming from China. Autonomous driving is being rolled out from China because China has the opportunity to work with an infinite amount of data. Artificial intelligence needs to gather experience, i.e., data. And that’s what AI learns in China. The battery also has its home in China. Without the help of Chinese manufacturers, we wouldn’t have it at all. The same applies to the software. So it would be a mistake to disengage from the technological progress of the future. And that is happening in China.
Do the Chinese still need the German carmakers at all?
The cooperation with German companies was and still is characterized by mutual recognition. Both sides have benefited considerably from this. The Chinese strengthen German engineering expertise. In the future, VW will benefit from the fact that technologies are developed much faster in China, which we can then incorporate into our cars. Perhaps China no longer needs Germany as much as the other way around. But there can still be a win-win situation.
Ferdinand Dudenhöffer was Professor of General Business Administration and Automotive Economics at the University of Duisburg-Essen until 2020. Now, he heads the CAR-Center Automotive Research in Bochum.
Fancy a tasty treat? Instead of boring conventional drinks like Pumpkin Spice Latte, Starbucks China is currently offering coffee specialties with crispy pork belly nibbles as a topping on the milk foam, lovingly decorated with syrup, of course. Or is that gravy? Dear baristas: How about chicken foot oat cappuccino or cardamom garlic coffee next?
When it comes to the competitiveness of Germany’s big car manufacturers, bad news has almost become the norm. Volkswagen, in particular, faces persistent criticism: too slow, structurally inflexible – but then again, morally far too flexible as far as the plant in Xinjiang is concerned. These are the accusations. Against this backdrop, the outlook of automotive market expert Ferdinand Dudenhoeffer on this traditional company is surprising. He praises the company’s reputation, strong brand, strong investments, and new partnerships – such as the one with Xpeng, which is supposed to shorten development times.
And despite the debate about human rights violations and excessive dependence on the People’s Republic, Dudenhoeffer is convinced that Volkswagen should not withdraw from China, but rather strengthen its position there.
Christian Domke-Seidel’s analysis provides the context for the transformation the German company is currently undergoing. He is also cautiously optimistic about the – slow – transformation of the company. Even though the world has changed rapidly: After all, the German car manufacturer suddenly must cooperate with companies that had to cooperate with VW a few years ago.
Numbers don’t lie, and they look good for Volkswagen in China. Last year, the company sold 3.2 million cars in the People’s Republic. Most of these – around three million – were cars with combustion engines and made a profit. However, the German company is increasingly falling behind in electromobility. An investment offensive is intended to change this. The necessary transformation is starting slowly, but at least it is underway.
Together with its joint ventures, the German company sold 1.6 percent more vehicles last year than in the year before. In the non-electric car segment, Volkswagen even increased its market share from 19 to 20 percent. Even EV sales are not as low as the reports suggest. 200,000 cars represent an increase of 23 percent.
But it all depends on the context. Volkswagen grows slower than the market. The EV market grew by 24 percent, and the New Energy Vehicle (NEV) segment, which also includes hybrid drives, grew by as much as 38 percent. Extrapolated to the overall market, this resulted in a growth of 5.6 percent. The fact that VW gained market share is attributable to the shrinking market for combustion engines, which lost around 6 percent, according to calculations by the Chinese Passenger Car Association (CPCA).
This did not happen by chance, as Stefan Bratzel explains. He is the founder and director of the Center of Automotive Management (CAM). “The situation in China is also related to the diesel scandal and the subsequent transformation. After 2015, VW was very focused on itself and had to take care of its European and US business. Then Covid hit. For years, China was not the focus of the company’s executives. They simply didn’t recognize the speed and innovation in the Chinese market.”
Volkswagen rightly concluded that it must react now and advance the transformation from a strong position.
At the end of last year, VW’s top management decided on a ten billion euro austerity package. The aim is to sustainably reduce the number of employees to increase the margin at the core brand. However, Volkswagen’s enormous investment plan, already approved in 2022, remains untouched. 180 billion euros are to improve the company in key areas by 2028. Two-thirds of the money is earmarked for electrification and digitalization.
China has an important role here. Volkswagen has massively expanded its production, development and innovation hub in Hefei. “This enables us to customize our products even faster to meet the needs of Chinese customers. In a dynamic market environment, a high pace of development is crucial for competitiveness,” Ralf Branstaetter, Volkswagen AG Board Member for China, commented on the move.
Chinese customers are very price-sensitive, Brandstaetter said during the announcement of the investments. The result is an almost destructive discount battle in the car market. This makes it crucial for Volkswagen to reduce costs and offer affordable cars.
Specifically, Volkswagen China Technology Company (VCTC) is developing an electric platform for the entry-level segment. The electric drive kit will be based on Volkswagen’s modular system. This could take new EVs from the concept stage to production readiness within 36 months. This is why the cost-cutting measures left VCTC untouched. On the contrary. When the platform goes online in 2026, it is expected to employ around 3,000 people. All developments and decisions relating to vehicles destined for the Chinese market come together at VCTC.
All of this is ambitious. However, the Chinese market is highly competitive. “VW will never regain the position it once had in China – i.e., being the big market leader. The Chinese manufacturers are too strong in next-generation technologies for that. VW must focus on maintaining its current strong position,” says Bratzel.
Volkswagen also further expands its management team in China. Thomas Ulbrich will take over as Chief Technology Officer China on 1 April 2024 and thus also become CEO at VCTC. He most recently served as a Board Member for New Mobility at VW. Within the company, Ulbrich is considered a proven development and software expert and has already held two management positions in China. His task is to advance localization (keyword: “in China, for China”) and networking.
“VW has sent Ralf Brandstaetter and now Thomas Ulbrich to China to have good people with a certain amount of clout there. The background to this is that VW wants to utilize the experience, speed and processes that exist in China as a blueprint for Europe,” Bratzel comments on the personnel decision.
Success will probably also be measured by whether and how well the various projects and investments can be harmonized. In addition to the well-known joint ventures SAIC Volkswagen, FAW-Volkswagen and Volkswagen Anhui, these also include the companies Gotion (battery) and the software unit Cariad. The integration of partners from Horizon Robotics (autonomous driving), ARK (user experience) and Thundersoft (infotainment) is also crucial for the company’s future.
Earlier this year, Anhui Automotive started manufacturing the Cupra Tavascan for export to Europe. A model for the Chinese market will follow later this year. Volkswagen’s investment in the Chinese EV pioneer Xpeng has also caused a stir. In exchange for 700 million dollars, the German company gained around five percent of the company, a seat on the board of directors and, a partner with whom two new electric cars are to be developed for the Chinese market. “With XPENG, we now have another strong partner that is one of the leading manufacturers in China in key technology areas,” Brandstaetter commented on the deal last year.
However, Bratzel also sees a bit of irony here: “In this catch-up process, VW suddenly finds itself cooperating with companies that had to cooperate with VW just a few years ago.”
Mr. Dudenhöffer, what do you know about how Volkswagen is currently doing in China?
Sales figures have significantly picked up again. With China boss Ralf Brandstaetter, Volkswagen is forging ahead in the Chinese market. Incentives such as price discounts certainly play a role here. But the important thing is that VW is stabilizing its market position. And what VW has planned – the new research and development center with the Chinese joint venture partner in Anhui, for example, or the cooperation with the Chinese car manufacturer Xpeng – I think is very promising. In my opinion, VW has made significant strides in China over the last twelve months. And you can now see that bit by bit.
VW seems to be in a dilemma. Combustion cars are selling very well – they make up a significant proportion of VW’s global sales. But when it comes to the transformation to electromobility, VW is clearly behind its Chinese competitors.
Everyone is lagging behind the Chinese, including Tesla. For VW, this has two reasons: the newly developed models, the ID family, have found little favor with Chinese customers. The models were not playful enough compared to the Chinese competition. And prices were relatively high. Both have now been adjusted. VW has recognized that the new cars need to have much more Chinese flair. Changes take time, you can’t make them in twelve months.
However, Volkswagen is still outclassed by its Chinese competitors, particularly in EV technologies like batteries and software. Can the gap be closed?
Absolutely. The decision to cooperate with Xpeng was important because Xpeng has the smart cockpit covered. And VW is in the process of becoming more Chinese by setting up a large development center in Anhui. Working closely with Chinese developers is particularly important in the software sector. In the battery sector, the Volkswagen subsidiary PowerCo is currently setting up battery plants for VW in China in cooperation with Guoxuan. When we look at the market today, we look at yesterday’s picture. The picture of tomorrow looks more positive.
There are currently over 150 EV manufacturers in China. Only a handful will probably survive. What makes you so sure that VW will be among them?
VW has a strong past, continues to enjoy a strong reputation and customers trust the brand. And: VW is investing heavily. There is a strategy whereby the cars are not developed in Wolfsburg but in China, i.e., in cooperation with Chinese companies. And they have found good cooperation partners. Volkswagen is working with Horizon Robotics, one of the leading AI specialists, so that the company can also catch up in terms of software. A new beginning can be seen at VW. In five years, we will know whether this is very successful or more of a medium success. But the direction is right.
But will that be enough? The big competitor is BYD, which knocked VW from first place in China last year. BYD needs less than 18 months to get a new model ready for the market, while VW needs over 40. Can the Germans keep up with that?
That’s why VW is developing its new models in China and no longer in Wolfsburg. And things are moving faster there with partners like Xpeng. BYD is a competitor that should be taken very seriously. But BYD will not be the only one selling electric cars in China and worldwide. There is SAIC, Great Wall, Geely – it’s a race for the future. What VW is currently doing in the battery sector is not yet at BYD’s level, but it does show exciting approaches.
In a transformation like the current one from the combustion engine to the electric car, newcomers such as Tesla have it easier than traditional manufacturers because they don’t have to lug around a huge apparatus with a large workforce that was hired for the old technology. How much of an impact will these legacy issues have on Volkswagen’s transformation in China?
BYD is not a newcomer either, but has also built combustion cars. However, BYD decided a year and a half ago to only build electric cars and plug-in hybrids. BYD is obviously also capable of this transformation. Yes, newcomers like NIO, Xpeng and Li Auto have an edge. But VW’s experience in the car business should not be underestimated. Customer relationships, for example, how to connect intermediate products in the long term. Nobody wants product recalls. You can also see that with Tesla, how certain things have only been improved and learned over time. But as I said, BYD is not a newcomer either, but it has quickly made the transition to electric cars.
Then there is the debate about the Xinjiang plant: BASF has announced its withdrawal from the province. Now, VW is also under massive pressure. How do you think VW should proceed?
That is difficult. BASF is a supplier in the chemicals sector. VW, on the other hand, is much more in the public eye in the end customer market. As far as I can tell, VW has already ensured that human rights and working conditions at its own plant are meticulous. To sell the plant overnight or even close it down would be a considerable entrepreneurial risk. Such a withdrawal would not only alienate the political elite in China, but also many Chinese customers.
And yet there is growing evidence that Uyghur forced laborers were involved in the construction of a VW test track, for example. Surely VW cannot ignore this?
I can’t pass judgment because I don’t know the situation on the ground. But we should be careful not to run around the world pointing fingers. I agree with former German Chancellor Helmut Schmidt, who once said that Germany is not the world’s moral teacher. What VW should do is commission auditors to assess the situation independently. If they can prove that there have indeed been human rights violations, consequences must be drawn.
Human rights organizations criticize that such independent audits are not even possible in an authoritarian country like China.
These organizations raise whether we can cooperate with China at all.
And?
I’ll stick by the words of Helmut Schmidt.
A debate about de-risking from China has long been raging in German politics. Can VW, with its holdings in 35 plants, become more independent of China?
Just like BMW does, just like Mercedes or Toyota do: VW must strengthen its position in China. Because without the Chinese market, you are no longer in the car business. Future innovations are coming from China. Autonomous driving is being rolled out from China because China has the opportunity to work with an infinite amount of data. Artificial intelligence needs to gather experience, i.e., data. And that’s what AI learns in China. The battery also has its home in China. Without the help of Chinese manufacturers, we wouldn’t have it at all. The same applies to the software. So it would be a mistake to disengage from the technological progress of the future. And that is happening in China.
Do the Chinese still need the German carmakers at all?
The cooperation with German companies was and still is characterized by mutual recognition. Both sides have benefited considerably from this. The Chinese strengthen German engineering expertise. In the future, VW will benefit from the fact that technologies are developed much faster in China, which we can then incorporate into our cars. Perhaps China no longer needs Germany as much as the other way around. But there can still be a win-win situation.
Ferdinand Dudenhöffer was Professor of General Business Administration and Automotive Economics at the University of Duisburg-Essen until 2020. Now, he heads the CAR-Center Automotive Research in Bochum.
Fancy a tasty treat? Instead of boring conventional drinks like Pumpkin Spice Latte, Starbucks China is currently offering coffee specialties with crispy pork belly nibbles as a topping on the milk foam, lovingly decorated with syrup, of course. Or is that gravy? Dear baristas: How about chicken foot oat cappuccino or cardamom garlic coffee next?
