At the recently concluded Shanghai Auto Show, German automaker Volkswagen—whose offerings in China range from luxury brands like Audi, Porsche, and Bentley to more volume offerings such as Skoda and VW and which has strategic tie-ups with Chinese companies like Shanghai Automotive Industry Corporation (SAIC) and the First Automobile Works (FAW) Group—underlined its focus on its “most important” market.
China is Volkswagen’s largest market, accounting for around half of Volkswagen’s global sales in 2021. While conventional ICEs remain significant, the German automaker is also pushing forward on vehicle electrification. In 2022, SAIC Volkswagen achieved a milestone, becoming the first automaker in the country to achieve 22 million in car sales. Meanwhile, China is the world’s largest EV market, with the China Association of Automobile Manufacturers (CAAM) noting that new energy vehicles (NEVs) achieved double digit market share for the first time in 2021 with a 13.4% share. Volkswagen has been keeping pace with China’s expanding NEV market, churning out more than 200,000+ NEV units in 2022.
With so much at stake, Volkswagen is going into overdrive with its ‘in China, for China’ strategy. It recently announced a €1 billion investment into setting up a cutting-edge research, development, innovation, and purchasing center for fully connected electric cars. Named ‘100%TechCo’, the center is slated to be headquartered in Hefei. It brings together teams spanning vehicles and components R&D to procurement. A crucial component is the involvement of local suppliers in the early product development phase and the integration of development initiatives occurring across the Volkswagen Group’s joint ventures in China. As competition intensifies, the goal is to be more agile in responding to customer demands and accelerating commercialization, with this strategy anticipated to effect a 30% reduction in product development times.
Our Perspective
In 2022, China was the world’s largest automotive market, leading in terms of passenger vehicle sales. It was also the world’s largest EV market, with sales projected to hit 9 million in 2023. CAAM data indicates that China’s automotive production touched 27.02 million in 2022, with NEVs accounting for 7.06 million. Meanwhile, overall vehicle sales were pegged at 26.86 million, including sales of 6.89 million NEVs.
With China as the centerpiece of their future roadmap, Volkswagen’s ‘in China, for China’ strategy has become crucial. The setting up of the ‘100%TechCo’ center in Hefei will accelerate the pace of product development and go-to-market plans by integrating development and procurement expertise and involving local suppliers from the early stages.
This comes at a time when competition is heating up, both from domestic car manufacturers as well as foreign companies like Tesla, BMW, and Honda. Simultaneously, it reflects the common trend of foreign automakers trying to strengthen localization, whether in terms of supply networks or capacity expansion. For instance, Japanese automaker Honda has a stake in CATL, the world’s leading EV battery manufacturer and is partnering with Chinese companies to build EV plants in Wuhan and Guangzhou. The BMW Group is slated to build a new plant in Jiangsu province as part of a collaboration with Great Wall to manufacture electric mini-vehicles.
Volkswagen itself is set to boost capacity with its third EV factory in Anhui province. The plant is set to have an annual capacity of 350,000 vehicles and be operational by end 2023. Audi is poised to set up its first EV factory in the country in Jilin province with an annual capacity of 150,000 vehicles by end 2024.
Volkswagen’s decision must also be seen against the backdrop of a bumpy few years for the global automotive industry, marked by the lingering effects of pandemic lockdowns, supply chain upheavals, the Russia-Ukraine conflict and strained trade relations between the US and China. The focus on localization is meant to insulate automakers from such disruptive trends.
Chinese consumers, typically, tend to be tech-forward, embracing innovative electrification, autonomy, and connectivity technologies. Accordingly, automakers are customizing offerings, ramping up the number of new models, and incorporating new features. Aligning with this trend, Volkswagen has partnered with Horizon Robotics, a leading Chinese chip manufacturer that supports automated driving. Here again, the use of local expertise is seen as key to accelerating innovation and realizing faster go-to-market strategy implementation.
