VW’s China playbook may come back to haunt it when rivals take it to Europe

Boxy, sturdy and no-nonsense, the Volkswagen Santana became a hit among Chinese government officials after the German carmaker began a 100-car trial assembly run with local partner Shanghai Automotive Industry Corporation (SAIC) in 1983.The car entered larger-scale production near Shanghai two years later, bringing modern European engineering to roads that were dominated at the time by dated, state-built bangers.In 2003, China overtook Germany to become VW’s largest market by car sales, with the Jetta surpassing the ageing Santana as the group’s most popular brand among a range that also included the Passat, Bora, Polo, and Audi.While China remains by far VW’s biggest market, it reported on Friday that its vehicle sales in that country slumped by almost 32 per cent in the first half of this year. It underperformed the wider market, which declined by one-fifth, according to China Passenger Car Association figures, driven by weak consumer confidence and an oversupply of electric vehicles (EVs) after government subsidies were scaled back following years of explosive growth. READ MOREThe vast majority of VW vehicles sold in China continue to be made locally, through joint ventures, even if Beijing has, over the past decade, gradually abolished the need for foreign automakers to have Chinese partners. Closer to home, VW car sales only edged 1.3 per cent higher in western Europe in the first half, even as figures from domestic industry associations show that new car registrations across Germany, the UK, Italy, France and Spain, the largest markets in the region, rose between 5 per cent and 10 per cent. In a market underpinned by growing demand for electrified cars, Chinese groups such as VW’s oldest local manufacturing partner, SAIC; BYD; Geely; Chery and Leapmotor, had captured 9.3 per cent of the EU market as of the first half of the year, according to European Automobile Manufacturers’ Association figures published on Thursday. That’s up 50 per cent on the year and from a virtual standing start only a few years ago. Years of investment have given Chinese manufacturers an advantage in batteries, supply chains, software and large-scale EV production, putting pressure on European carmakers as they overhaul business models built around the combustion engine.The vast majority of VW vehicles sold in China continue to be made locally, through joint ventures. Photograph: Qilai Shen/The New York Times The spike in fuel prices this year as a result of conflict in the Middle East has made running costs a much bigger factor when people choose which car to buy. This is especially true in Europe, home to some of the highest pump prices in the world.Bank of America analysts estimates that energy costs make up about 12 per cent of the total cost of owning an electric vehicle in the EU, compared with about 26 per cent for petrol or diesel cars.Chinese carmakers have moved from niche to mainstream by targeting the family-car segments of the market – where VW and Europe’s two other largest auto groups, Stellantis (whose brands include Peugeot, Citroën, Opel and Fiat) and Renault, are most exposed – with “good value for money” deals, they said in a recent report. VW’s shares fell as much as 3 per cent on Friday as the group reported a sharper-than-expected 9.5 per cent drop in operating profit, to €3.5 billion, between April and June. It warned that its full-year sales would drop as much as 3 per cent, having previously forecast up to 3 per cent growth. It piles pressure on chief executive Oliver Blume, who secured approval from his board and unions earlier this month to cut 50,000 jobs but is looking to double the figure in an effort to turn the group around after presiding over a series of profit and sales alerts in the past two years. All told, VW shares have reversed 33 per cent this year and 66 per cent over five years, with investor confidence further eroded by a string of software delays – and, in some cases, outright cancellations – as the company struggled first to match Tesla’s technology-led model and later to keep pace with fast-moving Chinese EV rivals.It’s far from alone. Stellantis has lost almost half its value so far this year, while Renault is down 29 per cent. At the luxury end of the market, BMW has slid more than 40 per cent, Mercedes-Benz is down 28 per cent, although Porsche, which is 75 per cent owned by VW, has only dipped 7 per cent. Market’s disenchantmentNothing better captures the market’s disenchantment with VW than the fact that the value of its holdings in Porsche and Traton, another listed unit that owns the group’s commercial vehicle brands, exceeds VW’s own market capitalisation by about €13 billion.The biggest threat to European carmakers is that Chinese rivals are no longer just exporting cars, they are starting to build them in Europe - often through joint ventures - echoing the strategy VW pioneered when it entered China four decades ago.The shift is being driven by looming EU local-content requirements for EVs and a clear effort by Chinese manufacturers to garner political acceptance in these parts. BYD, which last year overtook Tesla as the world’s biggest EV maker by sales and has set its sights on becoming the largest carmaker within five years, is building a factory in Hungary. Chery plans to start producing EVs later this year from a former Nissan plant in Barcelona, while Geely announced on Thursday it will build EVs in a Ford factory near Valencia and develop a model jointly with the US group. Blume has suggested in recent months that VW could move production of some of the EV models it developed for China to some of its underused plants in Germany. He’s floated opening up the factories to existing Chinese partners such as SAIC. It may win favour with powerful unions and save some jobs in the short term, but it could hand Chinese groups the keys to really compete on Europe’s own turf.