FOREIGN carmakers doing business in China once avoided talk of “technology transfer”. Their Faustian bargain with the country’s government allowed them to access its vast car market in return for the know-how they transmitted through joint ventures. Now that the flow of technology has reversed, they use the phrase openly. In a recent presentation on its business in China, executives from Volkswagen (VW) happily noted that it was “leveraging local partners for technology transfer”.
Over the past few years foreign carmakers in China have been flattened by local rivals such as BYD that have fast become world leaders in electric vehicles. As the Chinese market has gone electric, foreign carmakers’ share of it plummeted from 62% in 2020 to 35% last year. VW has lost its position as the top carmaker in the country. Last year it sold 2.9m cars in China, down from 3.9m in 2020. Only around 200,000 were EVs.
Some foreign carmakers, including America’s Ford and General Motors, are scaling back in China. But others are adopting local technology in an effort to fight back, by shifting more of their operations to the country and working with local firms. Toyota, Japan’s carmaking colossus, has expanded research and development in China, and collaborates with companies including BYD and CATL on batteries and Pony.ai on autonomous driving. Honda, another Japanese carmaker, is working with DeepSeek, an artificial-intelligence star, and Tencent, an internet conglomerate. BMW, a maker of posh vehicles, has built up a team of 3,000 local engineers and software developers, and has started collaborating with firms such as Alibaba, another internet giant, and Huawei, a maker of telecoms gear that also produces systems for cars.
No foreign carmaker, however, is doing more to become Chinese than VW. It is planning to release 30 new mass-market EV models in the country over the next five years, with the first due in early 2026. They will come with advanced self-driving capabilities and sleek interiors sporting large display panels—features that Chinese buyers often prize above all else—and will be significantly cheaper to make than earlier models. VW is also considering selling the cars in Asian markets such as Thailand, which Chinese companies are currently bombarding with cheap EVs.
To do this, VW is overhauling how it operates. It has built an innovation centre in the city of Hefei that employs more than 3,000 engineers, most of whom are Chinese. The facility is fully owned by VW, rather than being jointly held with a state-owned Chinese partner (which its local carmaking factories are). Perhaps its biggest advantage is that it has the ability to make many decisions without approval from headquarters in Germany. That freedom has helped reduce the time it takes to develop a new EV by about 30%.
Partnerships with local firms are the other important feature of VW’s China offensive. One of these is with Horizon Robotics, based in Beijing, which has helped it develop self-driving systems and chips. In 2023 VW also bought roughly 5% of Xpeng, a Chinese carmaker, for $700m, with which it is co-developing two EV models. An agreement between the two allowed VW engineers to temporarily move to Xpeng’s headquarters in Guangzhou to learn how it makes cars. VW also bought reams of code from the company.
Will the effort pay off? One risk is that VW’s operations are still not sufficiently localised to compete. Chinese carmakers have gained an edge over foreign ones with tight-knit supply chains that make them faster and cheaper. Another risk is that the vicious price war in the Chinese EV market makes even new models unprofitable. Thomas Ulbrich, VW’s technology chief in China, says it is difficult to know where prices will be in a year’s time, though he reckons that they will eventually reach a floor. Its Chinese rivals are backed by investors and state lenders that have been willing to accept years of losses, allowing them to focus on growth over profitability. That is a degree of localisation VW may find hard to pull off. ■
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