Volkswagen Group China is turning to local procurement to reduce costs as it accelerates a multi-year investment plan aimed at becoming one of China’s leading electric vehicle producers.
The automaker’s new “in China for China” strategy encompasses R&D, a substantial expansion of manufacturing capacity and a wider scope for collaboration with local partners.
Once known as the maker of Shanghai taxis, Germany’s largest automaker and its joint ventures now have nearly 100,000 employees and more than 40 vehicle and component manufacturing sites in China. From industrial robots and components to autonomous driving software and systems, it is deeply embedded in China’s automobile supply chain.
This is not what European Union bureaucrats or US politicians have in mind when they talk about “de-risking” economic relations with China but it is what the market dictates. Decades of relationship building and a commanding position in the world’s largest car market are now on the line.
In 2023, the Volkswagen Group delivered 3.2 million vehicles in mainland China and Hong Kong, a year-on-year increase of 1.6%. Deliveries of Audi premium brand vehicles rose 13.5% to 729,000 vehicles. Deliveries of battery electric vehicles (BEVs) increased by 23.2% to 191,800, or 5.9% of the total Chinese market.
In comparison, BYD sold slightly more than 3 million vehicles last year, 8% of which were exported. These included 1.6 million BEVs and 1.4 million hybrids. Tesla Shanghai delivered nearly 950,000 BEVs, slightly more than 600,000 of them to customers in China (Tesla does not make hybrids).
Volkswagen Group China’s BEV deliveries were up 72.3% in the fourth quarter, with its ID.3, ID.4 and Audi e-tron models contributing to the surge in sales. The ID.3 was the top-ranked compact hatchback while the ID.4 was one of the best-selling compact SUVs.
Zhang Lan, pice President of Group Sales of Volkswagen Group China, said that to maintain momentum in China’s highly competitive market, “we must continue tapping new market segments quickly, aligning our portfolio with new market trends effectively, while working on our cost structures.”
“It is not all about market share. Profitability continues to be our top priority,” said Ralf Brandstätter, chairman and CEO of Volkswagen Group China.
“In recent months, Volkswagen has identified and implemented cost optimizations for its fully electric vehicles in China,” he added. “We will not push ahead to grow at any cost in this highly competitive environment. We are focusing on investments for the next leap in innovation instead.”
Volkswagen increased its share of China’s internal combustion engine (ICE) market from 19% in 2022 to 20% in 2023, with deliveries rising by 0.8% to 3.04 million vehicles.
Economies of scale support the profitability of the business, which generates cash to invest in EV technology and production. Volkswagen Group China’s ICE vehicles are also being upgraded and converted to hybrids.
On January 11, 2024, the Chinese government announced a new target for new energy vehicles (NEVs) to account for 45% of new car sales in China by 2027.
NEVs include battery, hybrid and fuel-cell electric vehicles. China’s previous NEV sales targets were 20% of new car sales by 2025, 40% by 2030 and 50% by 2050.
The new target provides a new stretch of open road for automakers in China, which have been suffering from severe price competition, and a clear opportunity for Volkswagen.
Still, even if China achieves its target of 45% NEVs by 2027, more than half of new vehicle sales will still have internal combustion engines.
The Volkswagen Group plans to invest 180 billion euros between 2023 and 2027, with about two-thirds of that investment dedicated to digitization and electrification. By 2030, it aims to increase the share of NEVs in its sales mix in China to 40%.
In September 2023, Volkswagen announced that its new EV factory in the city of Hefei, Anhui Province, was ready to start production.
The factory has an initial production capacity of 350,000 vehicles per year – 82% more than Volkswagen’s BEV sales in China in 2023 – with room to increase that volume as necessary.
In November, Volkswagen announced plans to turn its manufacturing site in Anhui into a “state-of-the-art production, development and innovation hub.” The initiative will be led by the Volkswagen China Technology Company (VCTC), the Group’s largest R&D center outside of Germany.
VCTC’s goal is to reduce time-to-market for vehicles and components by 30%, including through the introduction of an entry-level EV platform within 36 months.
Based on the Volkswagen Group’s modular electric drive matrix (Modulare E-Antriebs-Baukasten in German, or MEB), the new platform will be designed specifically for the Chinese market.
“We are systematically developing Hefei into the Volkswagen Group’s innovation hub in China. And we are stepping up the pace. We have already demonstrated this with the construction of the Volkswagen Anhui factory in just 18 months” said Erwin Gabardi, CEO of Volkswagen Anhui.
“We are specifically utilizing new technologies and the outstanding infrastructure of the eastern Chinese province of Anhui. Its capital Hefei has developed into the Silicon Valley of China. We will also benefit from this innovative strength,” he added.
CEO Brandstätter said, “We are developing Hefei into the center of our ‘in China, for China’ strategy and a strong interface between all our joint venture companies and local partners. This boosts efficiency, increases the speed of development and optimizes our cost structure.”
Volkswagen Anhui has about 1,100 local suppliers providing components and services at prices considerably lower than those in Europe. It is also buying Kuka industrial robots in China rather than importing them from Germany.
Midea, the Chinese home electric appliance maker, took control of Kuka at the end of 2016. It now owns 100% of the company, which is the fourth largest industrial robot maker in the world after ABB, Fanuc and Yaskawa.
Kuka, which specializes in auto manufacturing but also serves other industries, has a global market share of about 12%. In China, it also supplies BYD, Nio, and CATL.
Kuka has three production bases in China – namely in Shanghai, Jiangsu and Guangdong – and three customer service centers. Kuka’s Swisslog subsidiary, which specializes in logistics robots, has production bases in Jiangsu and Guangdong.
In November 2023, Volkswagen (Anhui) Components Co Ltd (VWAC), which operates the Volkswagen Group’s first 100%-owned battery system factory in China, started production of its new high-voltage battery system, a key component for VolkswagenAnhui’s MEB EVs.
The new battery system consists of multiple cell modules, a cell management controller, a battery management system and connector strips. 96% of its components are supplied locally.
The entire production process is covered by automatic line-feeding technology combining automated guided vehicles, high-precision cameras and industrial robots that enable just-in-sequence logistics and accurate parts processing. Initial capacity will be 150,000 to 180,000 systems per year.
VWAC is also preparing to manufacture CTP (cell-to-pack) battery packs developed in cooperation with Gotion High-tech, in which Volkswagen is the largest shareholder.
Headquartered in Hefei, Anhui province, Gotion High-tech has operations in China, Germany, the US and Japan. At the end of December, Gotion announced that its first battery pack had been manufactured at its factory in Fremont, California.
In July 2023, Volkswagen bought 4.99% of Chinese EV start-up Xpeng, with which it plans to develop two new models to be introduced in 2026.
In October 2022, Volkswagen’s software subsidiary Cariad and Horizon Robotics announced plans to establish a 60-40% joint venture to develop computing solutions for Advanced Driver Assistance Systems (ADAS).
Based in Beijing, Horizon Robotics is a provider of software, processors and systems for autonomous driving. Known as Carizon, the new venture was officially launched in December 2023.
The Volkswagen Group has been doing business in and with China since 1978. It formed its first joint venture in China with Shanghai Automotive Industry Corporation (SAIC) in 1984 and its second, with First Automobile Works (FAW) in 1991.
In 2017, it established Volkswagen (Anhui) Automotive Company Ltd in Hefei, Anhui province, to manufacture NEVs in China for sale in the country.
In 2021, the Audi FAW NEV Company was incorporated to focus on the production of luxury NEVs in China. The Group is represented by several brands including Volkswagen Passenger Cars, Volkswagen Commercial Vehicles, Audi, Škoda, Jetta, Porsche, Bentley, Lamborghini and Ducati.
Instead of “de-risking” from China, Volkswagen is integrating its operations with those of an increasing number of Chinese partners, reducing its costs and accelerating its product development cycle to match that of the hyper-competitive Chinese auto industry.
As a result, it seems likely to overcome its dependence on internal combustion engines and gain a significant and profitable share of the world’s largest and most dynamic market for EVs.
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