HEFEI, China (AP) – In a significant shift in its strategy, Volkswagen is making a bold investment in China, the world's largest and most competitive auto market. The German carmaker, which once held over 50% of the market share, has allocated 3 billion euros ($3.5 billion) to develop a massive research and development center in Hefei, a city in central China with a population of 10 million. This investment marks Volkswagen's largest commitment outside of Germany.
Historically, foreign automotive companies, including Volkswagen, relied on a model of producing vehicles developed overseas while collaborating with local partners. However, rapidly emerging local competitors have disrupted this approach, significantly impacting the sales trajectories of foreign brands. Thomas Ulbrich, the Chief Technology Officer of the Volkswagen Group in China, remarked, "This business model is now gone," signaling a complete overhaul in how the company operates within this evolving market.
Volkswagen commenced a new strategy in 2022, aiming to create vehicles explicitly designed for Chinese consumers. These models will likely remain exclusive to China, although they might find markets in the Middle East and Southeast Asia. As these new vehicles are rolled out, Volkswagen will assess whether its substantial investment can help it regain market share against formidable local players like BYD and Geely. Rella Suskin, an equity analyst at Morningstar, believes this evolving strategy will likely stabilize Volkswagen's market share rather than significantly increase it, considering the competitive landscape.
The intensity of competition in the Chinese market has forced foreign automakers to reconsider their approach. The demand for electric vehicles has surged, encompassing nearly half of all new car sales. Consumers expect cutting-edge digital features, including large touch screens and advanced autonomous driving capabilities. Long-standing models like the VW Santana and Jetta, once symbols of everyday transport in China, no longer align with modern consumer preferences.
To compete effectively, Volkswagen recognizes the need to adapt to what is colloquially known as "China speed." In this highly competitive environment, foreign automakers typically take three to five years to release new models, whereas Chinese companies can achieve this in just 12 to 18 months. Bill Russo, CEO of Automobility, emphasized that rapid innovation is essential for survival in this market.
Furthermore, Volkswagen's strategy reflects a significant transformation in the sourcing and development of automotive parts and technologies. In the 1990s, many components for Volkswagen vehicles were imported from Germany; now, nearly all are produced in China. Decision-making power has shifted to the local operations to accelerate product development, allowing for greater responsiveness to market needs.
Other foreign automakers have adopted varied strategies in light of these changes. Some have scaled back operations or exited the market, while others, like Toyota, have empowered their China teams with enhanced decision-making authority in product planning and development. Volkswagen has also collaborated with Chinese EV startup Xpeng to expedite the introduction of new models and enhance its internal electronic systems.
The collaborative approach between foreign and Chinese companies illustrates a mutual learning process, which is increasingly seen as beneficial for both. Martin Hofmann, Volkswagen executive and chair of the German Chamber of Commerce in North China, noted that knowledge sharing is mutual, with many industry players expecting Chinese competitors to assume leadership in innovation within the next five years.
In summary, Volkswagen's substantial investment and strategic pivots aim to re-establish its footing in the competitive Chinese automotive domain. As the market continues to evolve rapidly, the carmaker's ability to innovate and adapt will be crucial in securing both market share and profitability amid the challenge presented by local competitors.
