A bright orange robot, 10 feet tall, hovers over Volkswagen’s new electric car assembly line in central China. It was imported from Germany. The factory’s other 1,074 robots were made in Shanghai.
Volkswagen used to import shock absorbers from Central Europe for the cars it makes in Chinese factories. Now they buy them from a company in China for 40 percent less.
After relying for decades on engineers in Germany to design cars for the Chinese market, Volkswagen has begun hiring a team of nearly 3,000 Chinese engineers, which will include 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 leadership in electric vehicles has disrupted global auto manufacturing. 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 business in China, which is the world’s largest car market and also Volkswagen’s largest market. VW’s goal is to match the speed and efficiency of Chinese electric car makers, which have grabbed a rapidly growing share of the Chinese car market. This has caused sales of the German manufacturer’s gasoline-powered vehicles to fall in China.
China’s municipal governments and state-controlled banks have been pouring money into electric car makers, helping them build new factories faster than their sales have grown. The resulting overcapacity has sparked a price war that has driven down electric car prices sharply. Volkswagen wants low costs to ensure its electric cars can be competitively priced. Therefore, in the coming weeks it plans to start production in Hefei of its new Tavascan sports utility vehicle, which will be sold in China and exported to Europe.
“We all know how difficult it is to make money on electric cars,” said Ralf Brandstätter, president and CEO of VW’s overall operations in China.
The need to cut costs is so great that it has also meant painful cuts in Germany, a difficult choice for a company that has been a pillar 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 is seeking to reduce its expensive and heavily unionized workforce in Europe, as well as reduce its dependence on expensive European auto parts manufacturers. Executives began breaking the news in late November to staff at the company’s headquarters in Wolfsburg that the European job reductions will have to be part of a 10 billion euro, or 10 billion, global cost-cutting plan. .9 billion dollars, started earlier this year.
“To increase our efficiency, we have to reduce our workforce,” Volkswagen CEO Oliver Blume told German newspaper Frankfurter Allgemeine Zeitung.
Cuts in Europe and imports from China could deliver a double blow for Germany, where the car industry has been a pillar of the economy and accounts for almost 800,000 jobs. Industry analysts predict that the shift to electric vehicles, which are easier to assemble than gasoline-powered ones, will cause that number to drop by 12 percent.
VW and Chinese automakers have begun building facilities in China to make electric cars, rather than converting existing factories. The new factories, for local manufacturers such as BYD and Nio, as well as for VW in Hefei, are among the most modern and highly automated in the world.
Midea, a Chinese appliance maker, in 2016 bought the German company Kuka, a leading producer of robots for automobile factories. VW’s new factory in Hefei uses robots from Kuka, which has moved a considerable part of its production to Shanghai.
Last summer, Volkswagen acquired a 4.9 percent stake in Xiaopeng, a Chinese electric car maker that is particularly strong in instrument panel electronics. And VW is replacing European parts makers that still supply its Chinese factories.
“The really big potential is localization, really localizing 100 percent of the parts in China,” said Ludger Lührmann, chief technology officer of VW’s Hefei operations.
Volkswagen’s move reflects a painful reality for all traditional multinational auto companies: They have been caught off guard by China’s rapid shift toward electric cars and Chinese automakers’ success in cutting costs, said Bill Russo, an electric car industry consultant in Shanghai.
Electric cars account for more than 30 percent of China’s auto market, up from 5 percent three years ago. By 2025, VW hopes, half of the cars sold in China will be electric.
Multinational companies have long sold most of China’s gasoline cars through joint ventures with local automakers. But they sell less than 20 percent of China’s electric cars, and they are mostly made by Tesla, the American automaker. Chinese electric vehicle makers BYD, Shanghai Automotive Industry Corporation, Zhejiang Geely, Li Auto and Nio have moved much faster than their European counterparts.
Volkswagen has long been the leader in gasoline-powered cars in China, owning nearly 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. Its new factory in Hefei is designed to initially produce 350,000 cars a year, more than the industry standard size of about 250,000. And the buildings have been built with large expanses of empty space inside, so that more equipment can be quickly installed to further increase production.
Building a factory in China, rather than converting existing ones, has big advantages for Volkswagen. Starting in the 1980s, when China began to open up to foreign automotive investment, Beijing required foreign automakers to assemble gasoline-powered cars in China through joint ventures with its state-owned automakers and share the 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 its electric car manufacturing operations in Hefei (a local partner owns the rest) and VW owns all of its new engineering center in the city. You have full administrative control of both. Tesla, the largest foreign electric car manufacturer in China, has operated in Shanghai since 2019 without any joint venture requirements.
Foreign automakers are allowed full ownership of factories that make auto parts. Therefore, it has been more worthwhile to convert them into electric car component production.
Despite its aggressive new push in China, Volkswagen must compete with a domestic auto sector that receives heavy government aid. Just 30 miles from its Hefei factory, a Chinese electric rival, Nio, has opened its second factory. Its operation is, in some respects, even more advanced than Volkswagen’s: sections of the assembly line are essentially mobile and can be moved to new locations.
The local government provided the land and building, said Ji Huaqiang, Nio’s vice president of manufacturing. “Nio does not own the factory or the land; It’s rented, but the factory was custom built for Nio.“ he said.
Nio’s two factories give it the capacity to assemble 600,000 cars a year, although its annual sales rate this fall is only about 200,000 cars. However, Nio is already building a third plant.
Volkswagen executives say that since China is doing so much to strengthen its auto industry, they have to participate. “Building a Chinese automotive industry,” Brandstätter said, “was always a clear goal of the government’s industrial policy.”
