Volkswagen launches China-designed cars in bid to revive fading market share

Volkswagen has begun rolling out the first vehicles developed under its “in China, for China” strategy, marking a $3.5 billion investment in locally designed cars aimed at reviving the German automaker’s position in the world’s largest auto market. The company, which once derived more than half its annual profit from China, has watched its market share erode rapidly as Chinese electric-vehicle makers introduced cars with more advanced digital technology and faster development cycles.

“Welcome to the fitness center of the automotive industry, where technology cycles are shorter, competition is more intense and customer expectations change faster than anywhere else,” Volkswagen Chief Executive Officer Oliver Blume said during a recent visit to China.

To catch up, Volkswagen has sought to insulate its Chinese operations from the Eurocentric designs and slow decision-making of its German headquarters. The company has invested in a sprawling development center in Hefei and struck deals with several technology-savvy local firms. The center covers an area equivalent to 18 football fields and houses major new testing facilities, including an electromagnetic-compatibility lab lined with spikes for minimizing electronic interference during testing. The company said having the full range of testing capabilities in China cuts development times by 30%. A new chassis test bench reduces road-worthiness testing from 30 weeks to 10, and the machine arrived at the Hefei facility even before Volkswagen’s German headquarters received one.

The first vehicle off the line, the ID. Unyx 07 sedan, began production at a Hefei plant in January. The car is the first Volkswagen to feature the kind of powerful central computers that allow higher levels of autonomy and AI-powered features. On a test drive through Hefei, the car navigated dense motorway traffic and an underground parking lot, with a safety driver keeping his hands on the wheel as required under Chinese regulations.

Volkswagen developed the self-driving technology in partnership with Horizon Robotics, a Beijing-based tech company. More advanced versions capable of navigating city streets are planned for release later this year.

The company bought a roughly 5% stake in local EV startup Xpeng in 2023 and has since tapped the firm’s expertise to help develop the electronics in the ID. Unyx 07 and two additional vehicles set for release this year. Thomas Ulbrich, chief technology officer for Volkswagen China and head of the Hefei development center, said Xpeng helped “jump-start” the task of catching up with local rivals.

The arrangement represents a reversal of longstanding industry dynamics. For decades, Volkswagen supplied technology to its Chinese joint ventures, and high-margin licensing fees flowed back to Germany. Now Chinese companies are providing know-how and reaping the financial rewards.

The financial toll has been substantial. Volkswagen expects its Chinese operations to generate a profit of less than $500 million this year, down from $5 billion a decade ago. In a recent investor update, the company said 2026 will mark the low point, with investments beginning to bear fruit in 2027, though not on the scale of the prepandemic era.

The new vehicles are launching into a difficult market. Chinese car sales fell for a seventh straight month in April, and EV sales have been particularly weak this year following the expiration of subsidies. In the first quarter, Volkswagen re-emerged as the market leader in China, buoyed by its still-large business selling gas-engine cars.

Volkswagen is set to launch more than 20 new cars in China this year. At a launch event ahead of April’s Beijing auto show, the company unveiled four new EVs alongside Chinese drumming and a local dance troupe performance. The lineup included the ID. Unyx 09, part of a subbrand launched in 2024 to attract younger consumers, and a new Audi, the E7X, with the brand name spelled out on the hood rather than represented by the traditional four overlapping rings—a revamp aimed at attracting buyers for a brand historically associated with government officials.

“Chinese consumers used to look at Volkswagen and think quality. Now they think old,” said Michael Dunne, chief executive of auto-consulting firm Dunne Insights.

While the new cars represent a substantial upgrade, analysts questioned whether Volkswagen can sustain the pace of innovation required to compete in China. Thomas Luk, a China-based consultant and former McKinsey partner based in Stuttgart, said Volkswagen has “now basically burned all its fireworks” and questioned whether the company is prepared to reinvest at the level Chinese competitors achieve routinely.

Volkswagen’s response to the challenging domestic market mirrors that of its Chinese rivals: exports. The company wants to sell its Chinese-developed EVs in Southeast Asia, the Middle East, and South America, though it has no plans to offer them in Europe, where it maintains significant manufacturing capacity, or in the United States, where they are effectively banned.

The Chinese strategy has also had consequences in Europe. Development hiring in Hefei has been offset by job cuts at German headquarters, and declining profit and licensing fees from China have forced cost reductions across the company.

“Developing cars in Europe for Europe and bringing them to the world: This business model has had its day,” Blume said.