When Volkswagen AG opened its first factory in China four decades ago, competition was, well, pretty much nonexistent. Jeep had just arrived, and a handful of locals with names such as First Auto Works and Second Auto Works, which mostly specialized in heavy trucks and buses, had made occasional detours into proletarian people movers like the East Wind and the Red Flag. So VW’s Santana—a boxy, no-frills sedan based on an early version of the Passat—quickly became the preferred mode of transport for ambitious corporate chieftains, political bosses and, later, the growing middle class. The German company soon became the leading brand in China, and in some years its operations provided almost half of VW’s global revenue.
Like other foreign brands, VW was required to sign up joint-venture partners that would officially control the operation, a strategy aimed at transferring design, engineering and marketing chops to local companies. (Today, VW has three: in Shanghai, Jilin and Anhui.) Those partners, and newer companies started by people who once worked at them, have proven to be very adept students. Today, China’s domestic automakers control half of the market, up from a quarter in 2008. VW’s sales have dropped by more than 10% this year alone after falling from 4.2 million vehicles in 2019 to 3.2 million last year. “The technological progress made in that country is really outstanding,” Oliver Blume, VW’s chief executive officer, said during the company’s earnings presentation in March. “This constitutes a major challenge.”
The trend is being accelerated by the rapid growth of battery-powered vehicles, with EVs and plug-in hybrids on track to reach about 40% of China’s vehicle deliveries in 2023. That’s been a boon to BYD Co., China’s biggest EV maker, which in the first quarter jumped ahead of VW in passenger car sales. Profit at BYD, which is backed by Warren Buffett, more than quintupled last year, to $2.4 billion, and the company is on course to become China’s leading car brand by December, ending VW’s two-decade run at the top.
