Volkswagen is placing a high-stakes bet on China, the world’s largest and most fiercely competitive auto market, as it fights to remain relevant in a rapidly changing industry.
Once commanding more than half of China’s car market, the German automaker has committed €3 billion to a massive research and development hub in Hefei, a central Chinese city of about 10 million people. It is the company’s largest R&D investment outside Germany and marks a decisive break from how foreign carmakers have traditionally operated in China.
For decades, global manufacturers sold vehicles designed overseas, sharing technology with local partners. That model has been overtaken by fast-moving Chinese automakers, whose aggressive pricing, rapid innovation, and deep understanding of local consumers have sharply eroded foreign brands’ market share.
“This business model is now gone,” said Thomas Ulbrich, Volkswagen Group’s Chief Technology Officer for China.
The shift began in earnest in 2022, when Volkswagen launched a major overhaul of its China strategy. The company is now developing vehicles specifically for Chinese consumers, models that may never be sold in Europe but could be exported to markets in Southeast Asia and the Middle East.
The success of this approach will determine whether Volkswagen can regain ground lost to domestic competitors such as BYD and Geely. Analysts say the strategy is necessary, but expectations remain measured.
“This is key to maintaining competitiveness in China,” said Rella Suskin, an equity analyst at Morningstar. “But it is more likely to help Volkswagen stabilise market share at current levels rather than recover what it has lost in recent years.”
Profitability remains the bigger challenge. China’s auto market has become intensely price-driven, with margins squeezed by heavy discounting and fierce competition.
Within the group, Audi has taken the lead by launching a new China-focused brand, branded simply as “AUDI,” while Volkswagen plans to roll out new 2026 models developed entirely “in China, for China.”
“It’s a million-dollar question whether this strategy will pay off,” said Claire Yuan, director of corporate ratings for China autos at S&P Global Ratings. “But they are moving in the right direction to catch up.”
The urgency reflects how quickly the Chinese market has evolved. Electric vehicles now account for roughly half of new car sales, and buyers increasingly expect advanced digital features, large touchscreens, and autonomous driving functions as standard.
As Chinese brands continue to set the pace, Volkswagen’s China reset represents both a necessary adaptation and a test of whether a former market leader can still compete in an industry it once dominated.
