Why Volkswagen is building a team of 3,000 engineers in China

A bright orange robot measuring over 10 feet tall looms over Volkswagen’s new electric car assembly line in central China. It was imported from Germany. The factory’s remaining 1,074 robots are made in Shanghai.

Volkswagen used to import shock absorbers from Central Europe for cars it made in Chinese factories. Now it buys them for 40 percent less from a company in China.

After decades of relying on engineers in Germany to design cars for the Chinese market, Volkswagen has begun hiring a team of nearly 3,000 Chinese engineers, including hundreds transferred from Volkswagen operations elsewhere in China. They will design electric cars at VW’s industrial complex in Hefei, a city in central China.

The new strategy, which Volkswagen calls “In China, for China,” is another sign of how China’s leading position in electric vehicles has upended global auto production. Chinese car brands are increasingly appearing in Germany and across Europe, causing politicians to worry about job losses.

But Volkswagen is doubling down on its activities in China, the world’s largest car market and also Volkswagen’s largest market. VW’s goal is to match the speed and efficiency of China’s electric car makers, which have captured a rapidly growing share of the Chinese car market. That has led to a decline in sales of the German automaker’s gasoline vehicles in China.

China’s city governments and state-controlled banks have poured money into electric car makers, helping them build new factories faster than their sales grew. The resulting overcapacity has caused a price war that has driven electric car prices down sharply. Volkswagen wants low costs so that its electric cars can be priced competitively. Therefore, in the coming weeks it plans to start production in Hefei of its new Tavascan SUV, which will go on sale in China and exported to Europe.

“We all know how difficult it is to make money on electric cars,” said Ralf Brandstätter, chairman and CEO of VW’s overall China business.

The need to reduce costs is so great that it has also led to painful cutbacks in Germany – a difficult choice for a company that has been a mainstay of German industry since the 1930s. The German state of Lower Saxony owns almost 12 percent of the company. European union leaders occupy almost half of the seats on the company’s supervisory board.

Volkswagen wants to trim its costly, heavily unionized workforce in Europe and reduce its dependence on expensive European auto parts makers. Executives began breaking the news to staff at the company’s Wolfsburg headquarters in late November that job cuts in Europe will have to be part of a 10 billion euro (or $10.9 billion) global cost-cutting plan that was announced earlier this year got started.

“To increase our efficiency, we need to reduce our workforce,” Volkswagen CEO Oliver Blume told German newspaper Frankfurter Allgemeine Zeitung.

Cutbacks in Europe and imports from China could deliver a double whammy for Germany, where the auto industry has been a mainstay of the economy and supports nearly 800,000 jobs. Industry analysts predict that the shift to electric vehicles, which are easier to assemble than gasoline-powered cars, will see this number shrink by 12 percent.

VW and Chinese automakers have started building new facilities in China to make electric cars, instead of converting existing factories. The new factories, for local manufacturers such as BYD and Nio, but also for VW in Hefei, are among the most modern and automated in the world.

Midea, a Chinese appliance manufacturer, bought the German company Kuka, a leading manufacturer of automotive factory robots, in 2016. The new VW plant in Hefei uses robots from Kuka, which has moved significant production to Shanghai.

Last summer, Volkswagen acquired a 4.9 percent stake in Xiaopeng, a Chinese electric car manufacturer that is particularly strong in the electronics of instrument panels. And VW is replacing the European parts manufacturers that still supply its Chinese factories.

“The really big potential is localization, to really localize 100 percent of the parts in China,” says Ludger Lührmann, Chief Technology Officer for VW’s operations in Hefei.

Volkswagen’s move reflects a painful reality for any traditional multinational car company: They have been caught flat-footed by China’s rapid shift to electric cars and Chinese automakers’ success in cutting costs, says Bill Russo, an electric car industry consultant in Shanghai.

Electric cars account for more than 30 percent of the Chinese car market, up from 5 percent three years ago. VW expects that half of the cars sold in China will be electric by 2025.

Multinationals have long sold the majority of China’s gasoline cars through joint ventures with local automakers. But they sell less than 20 percent of China’s electric cars, most of which are made by Tesla, the American automaker. Chinese electric vehicle manufacturers BYD, Shanghai Automotive Industry Corporation, Zhejiang Geely, Li Auto and Nio have made much faster progress than their European counterparts.

Volkswagen has been the market leader in petrol cars in China for many years and controls almost a fifth of the market through two large joint ventures with Chinese state-owned companies. But it sells less than 3 percent of the country’s electric cars.

VW is racing to catch up. The new Hefei plant is designed to initially produce 350,000 cars per year, more than the industry standard of about 250,000. And the buildings are built with large amounts of empty space inside, so that further equipment can be quickly installed to boost production even further.

Building a factory in China, instead of converting existing factories, has major advantages for Volkswagen. Since the 1980s, when China began opening up to foreign investment in the automotive sector, Beijing has required foreign automakers to assemble gasoline-powered cars in China through joint ventures with state-owned automakers and share management control. Volkswagen owns 40 percent of one of its joint ventures, with First Auto Works, and 50 percent of the other, with Shanghai Automotive.

But Beijing has exempted electric car production from the joint venture rule. Volkswagen owns 75 percent of Hefei’s electric car production – a local partner owns the rest – and VW fully owns its new technical center in the city. It has full administrative control over both. Tesla, China’s largest foreign electric car maker, has been operating in Shanghai since 2019, without any joint venture requirement.

Foreign car manufacturers are allowed to have full ownership of factories that make car parts. So it has been more worthwhile to convert these into the production of electric car parts.

Despite its aggressive new push in China, Volkswagen must compete with a domestic auto sector that receives heavy government support. Just 50 kilometers from the Hefei factory, a Chinese electric rival, Nio, has opened its second factory. Its operation is in some ways even more advanced than Volkswagen’s: parts of the assembly line are essentially mobile and can be rolled to new locations.

The local government provided the land and building, said Ji Huaqiang, Nio’s vice president for manufacturing. “Nio does not own the factory or the land – it rents, but the factory is custom built for Nio,” he said.

Nio’s two factories give the company the capacity to assemble 600,000 cars a year, even if annual sales are only about 200,000 cars this fall. Nevertheless, Nio is already building a third factory.

Volkswagen executives say they need to get involved now that China is doing so much to build its auto industry. “Building a Chinese auto industry,” Mr. Brandstätter said, “has always been a clear goal of the government’s industrial policy.”