How Volkswagen Lost Its Way in China

"A brutal price war, sudden shifts in consumer demand and human rights issues in Xinjiang have left VW stumbling in a market it led for 40 years.

The high walls of industrial buildings at Volkswagen’s assembly plant in the heart of northwest China’s Xinjiang region extend for hundreds of yards, once a symbol of German industrial might and now a marker of Volkswagen’s business and political quagmire in China.

For four decades, Volkswagen Group was the market leader in China, where drivers prized its wide range of cars, from frugal Volkswagen Santanas to potent Audis and Porsches. But VW has been replaced as China’s go-to carmaker by the Chinese electric vehicle powerhouse BYD.

BYD rapidly expanded all-electric car sales over the past three years, forcing VW to make a big bet last year on that market. Then BYD caught VW off guard again early this year by ramping up sales of plug-in gasoline-electric hybrids that can go long distances on only battery power, with tiny gasoline engines as backups. VW has few offerings in that fast-growing category, a gaping hole it won’t fully close until the end of next year.

“Chinese consumers see VW as the king of yesteryear, an era when global brands reigned supreme,” said Michael Dunne, a China auto industry consultant. “Today, many Chinese consumers shrug at VW products with indifference. They prefer fresher, more compelling offerings from home-team brands.”

China’s state-owned banks and local governments have been pumping money into local automakers, allowing some manufacturers to sell cars far below the cost of making them. Volkswagen executives say that they refuse to join the price-cutting war and that they have relinquished market share as a result.

“Electric cars are being forced onto the market at discounts of up to 50 percent,” a Volkswagen spokesman said. “We therefore decided last year that we do not want to continue growing at any price in this unhealthy environment.”

Volkswagen’s troubles in China are affecting the company as a whole. Its 10.2 percent drop in the number of cars sold in China during the first nine months of this year more than erased all of its sales gain in the rest of the world. The entire group’s worldwide sales shrank slightly as a result, and the company announced on Tuesday that its profits plunged in the third quarter.

The company may have to close factories in Germany for the first time in its 87-year history — as many as three plants, each employing thousands of workers — partly because of competition from China.

Political missteps have compounded VW’s troubles.

In May, VW started exporting battery-electric cars from China to Europe. The problem was that the European Union had already begun moving toward imposing tariffs on such vehicles brought in from China.

The European Commission, the executive arm of the European Union, began an investigation over a year ago into whether the Chinese government had improperly subsidized electric cars. Beijing responded by pressuring manufacturers not to cooperate with the European inquiry. Unlike some other foreign manufacturers, VW declined to share information with the European Commission.

VW began shipping Cupra Tavascan battery-electric cars in May to Europe from a new design and production complex in central China. But soon after, the European Commission decided to impose the tariffs. Companies like VW that did not cooperate were told they would face the highest tariff of all starting this week: 37 percent.

VW managed to wangle a reduction in its tariffs to 21 percent, and those tariffs took effect on Wednesday. But Tesla, which is one of VW’s biggest rivals and had cooperated earlier, persuaded the commission to cut its tariff to just 7.8 percent. BYD is paying 17 percent. VW faces the possibility of a lasting disadvantage in its home market on any electric cars imported from China, the world’s low-cost producer.

The latest difficulty for VW came on Oct. 23, when the foreign ministry said the Volkswagen brand’s chief marketing officer in China had tested positive for cocaine, been jailed for 10 days and then deported. He had just returned from a vacation in Thailand when he was tested. VW declined to comment on the case.

But Volkswagen’s longest-running problem in China lies in Urumqi, the capital of Xinjiang.

Volkswagen and a state-owned joint venture partner, SAIC Motor of Shanghai, built an assembly plant in Urumqi in 2013 to make inexpensive, gasoline-powered cars to sell in western China. Volkswagen had made a point of hiring numerous Uyghurs, a predominantly Muslim ethnic group in Xinjiang. Uyghurs have long faced discrimination from Chinese employers, and distrust of Uyghurs deepened after deadly attacks by Uyghur militants from 2008 to 2014.

Beginning in 2014, China cracked down hard on Uyghurs and other predominantly Muslim ethnic groups in Xinjiang. As many as a million ethnic Uyghurs, Kazakhs and other minorities were sent to indoctrination camps, detention centers and prisons. Associated forced-labor programs to send rural Uyghurs to factories and other urban jobs also drew heavy criticism from human rights groups and have prompted the United States and some European countries to restrict imports from Xinjiang since 2021.

VW had to stop the delivery of 30,000 Audis and other premium cars to American customers last spring after it realized that a VW supplier had been buying an engine component from Xinjiang, in violation of the American regulations. The luxury cars sat at American ports while replacement parts were vetted and installed.

At the same time, VW faces accusations by overseas activists that it has used forced labor by Uyghurs to build its test track near Urumqi. VW denies doing so. But when it hired an auditing firm late last year to review its compliance in Xinjiang with international labor standards, the audit was criticized overseas for not doing enough to protect the anonymity of the workers who participated.

Another problem for VW is that the joint venture assembly plant in Urumqi has not made cars since 2019 because of weak sales. It is down to 190 workers who do the final preparation of cars for delivery to VW dealerships in western China.

Demand for gasoline-powered cars has collapsed in China. Exports from Urumqi are impractical: Nearby Central Asian countries buy few cars, and the plant is 1,800 miles from the coast, too far for seaborne shipments.

In interviews this month, Volkswagen owners in Urumqi said they were happy with their gasoline-powered cars and did not want electric models. Their biggest concern about electric cars was that they were incompatible with the region’s severe cold, which hurts electric cars’ batteries and reduces their driving range.

But Xinjiang by itself is a small market for cars. With electric cars and plug-in hybrids making up 54 percent of China’s car market and still rising, nationwide sales of gasoline-powered cars are expected to fade further.

VW needs to close assembly plants in China for gasoline-powered cars. It has halted production at a factory in Nanjing in eastern China and has not assigned any future car models to it — harbingers of a possible closing.

Since February, VW has been saying it is in “advanced talks” to decide the future of its activities in Xinjiang. But exiting Xinjiang is proving hard for any foreign company.

BASF, the German chemicals giant, said it had started trying a year ago to sell its stakes in two joint ventures in Xinjiang. But it has yet to win government permission. In September, the Ministry of Commerce began investigating whether PVH, the corporate parent of the Calvin Klein and Tommy Hilfiger clothing brands, had taken “discriminatory measures” by not buying products from Xinjiang.

Complicating VW’s dilemma is that its partner in Xinjiang, SAIC, is wholly owned by the Shanghai municipal government and closely follows Beijing’s wishes. But SAIC’s continued involvement is starting to draw criticism from human rights activists in Europe. China’s foreign ministry declined to comment, and SAIC Motor, which owns and manufactures the MG brand, did not respond to requests for comment.

In February, the foreign ministry urged VW and BASF not to leave Xinjiang, saying they should “cherish the opportunity to invest and develop in Xinjiang.”" [1]

1. How Volkswagen Lost Its Way in China. Bradsher, Keith.  New York Times (Online) New York Times Company. Oct 31, 2024.