Volkswagen's China Problem

China in 1983 was the version of China that made its transformation into what it is today so very remarkable that's to say it was poor and it was underdeveloped its GDP per capita was $32 making for a ranking of 161st in the world below the Central African Republic Uganda and the koros this made the country rather unattractive as an expansion market for Multinational Enterprises the population was massive sure but it didn't have a whole lot more going for it from the perspective of corporate Executives and ultimately even if companies wanted to enter the Chinese market for the longest time they just simply couldn't it was one of the most closed off economies in the world it was a centrally planned socialist economy incompatible with the capitalist ones from the west and there were barely even diplomatic relations with Europe and America let alone economic ones so it's no surprise that before the 1980s no Western auto manufacturer had entered the Chinese Market change started after Deng sha ping took power he kicked off the process of economic reform leading to the process of opening up leading to the Chinese government inviting a few Western auto manufacturers to form joint ventures with Chinese car companies leading to the first Chinese made Volkswagen rolling off the line in Shanghai in 1983 this was fortuitous VW had been coaxed into forming a joint venture with the Shanghai automotive industry Corporation and it happened at the absolute perfect moment these same economic reforms that made it possible for VW to enter the market kicked off the transformation into the middle income Behemoth China is today and as disposable incomes grew and the Chinese middle class expanded so too did the country's Car Sales since then more so than any Western Auto Company VW has thrived on China sales in fact by the early 2000s the country accounted for half of their Global profit it was the group's single largest market manufacturing costs were cheap sales were numerous and profit margins were enormous at least until recently for decades total sales in China were Rising while the group's market share largely held steady in 2019 sales hit nearly 4 million units but then the bottom fell out Co can explain these years sure but not these ones as VW has struggled to hit 3 million unit sales and in the first three quarters of 2024 only mustered 2 million across the 39 VW group factories in China earnings are down about 50% from the high set in 2015 while it's looking even worse for certain brands within the group scoda a Czech automaker owned by VW since 1991 has watched its sales absolutely tank across the 2020s a disaster for a brand that's tailored designs and even entire models specifically to appeal to the Chinese consumer but what makes makes this a true crisis for the world's largest auto company is that things are bad Beyond China too this Factory in Brussels Belgium has been building Volkswagen since the 1950s and Audi's since 2006 but now on account of slumping Audi Q8 rron sales VW has announced the factory will close its doors at the end of February 2025 without a viable buyer for the factory thousands of jobs are set to vanish entirely it likely won't be the last plant to close either as Volkswagen announced that it would also potentially close three additional factories within Germany in an attempt at massive overhaul something the company has simply never done in its Home Country all this the massive slump in sales the unprecedented response to right size and stabilize and the developing domestic distrust coming from it has seen the group's sea Suite shuffled German Factory workers on strike and pundits declaring this as potentially the beginning of the end of Volkswagen's Global dominance but perhaps most concerningly there's a reason to believe that China is just the canary in the coal mine the graph speaks for itself here's vw's market share in China it's in freef fall and here's the market share of byd China's newly minted Automotive bth back in 2020 its market share sat at 1. 8% today it's at 11% making it not only the new largest Auto Company in China but also the world's largest ev manufacturer usurping even Tesla byd's explosive growth was spurred like many things in China by a combination of central planning and free market economics around 2020 Chinese governments of all levels National provincial and local started rolling out a deluge of incentives for EVS and plug-in hybrids in Shanghai for example the municipal government requires car buyers to first purchase a license plate as a method of restricting the number of cars hitting the road these are sold via a monthly auction where demand always far outstrips Supply only about 5 or 6% of biders typically hit a plate pushing prices up to between 12 and $14,000 but for a number of years EV buyers could get a license plate for free an absolutely massive incentive considering some Chinese EVS now cost less than a license plate in Shanghai there's also been a Litany of buyer rebates sales tax exemptions infrastructure funding direct support of automakers and more that's total to an estimated $230 billion in funding for EVS by the Chinese government between 2009 and 2023 where as elsewhere EV incentives were merely focused on making them price competitive with internal combustion cars in China they were often significantly cheaper so it's no surprise their sales exploded but of course that just explains why China transitioned to EV so quickly not why byd usurped VW the explanation for that is that well ID's cars were just simply better in recent years vw's entry level EV in the Chinese market was its ID3 which it was selling for about $23,000 this model boasts a 0 to 50 km perh time of 3 seconds and a certified range of $450 km in the US or Europe This would seem like a steal relative to other EVS but in China for half that price about $11,800 a buyer could instead get the upper trim of the entry level B by deev the seagull this has a slower 4. 9 second 0 to 50 km time and a shorter 405 km range but it's not too far off and there are plenty of other by EVS selling for well below the ID 3's price yet boasting better specs the byd dolphin KN version has 520 km of range yet sells for under $118,000 for example and the Volkswagen group isn't doing much better on the other end of the spectrum either the group's two primary luxury Brands Audi and Porsche are each struggling as well Audi sold fewer than 15,000 EVS to China in the first 9 months of 2024 and Porsche sales are in such freef fall that the company is closing a third of their dealerships in the country there is a market for higher-end Western EVS in China but that market has been absolutely dominated by Tesla the company convinced the government to allow them to build their own dedicated Factory in China the first time ever a foreign auto company has been allowed to to enter the Chinese market outright not as part of a joint venture with a Chinese firm now Western Brands typically are able to command a price premium in China they're often viewed as luxury goods VW doesn't necessarily need to beat its Chinese competitors on price for equivalently speced cars as historically consumers have perceived the Western Brands as just simply better until recently that is even if the ID3 or other vws might match or beat byd equivalent on range or acceleration or charging time the day-to-day experience of owning a VW EV is reportedly just worse they lose in the details and nowhere is that more true than with software now up until the 2010s really car manufacturing was largely an exercise in industrial expertise with companies like Toyota Volkswagen and General Motors vying for the world number one spot in total sales on account of their ability to produce durable Dependable fix ible Hardware then came Tesla Apple carplay Ling assist heads up displays and a myriad of other features running from safety to incar entertainment that required cars capable of computing suddenly a software Revolution for legacy car makers such rapid change was jarring But ultimately was such that they could at least keep up with through Outsourcing to smaller more Nimble software companies making Revolution more manageable too was the fact that internal combustion engine cars simply don't requ require the same level of software sophistication as an electric vehicle a touchscreen infotainment system doesn't necessarily need to interact with or be aware of a lane assist or automatic braking safety feature for instance so to keep up Volkswagen at first went the route of other Legacy car makers contract out the software focus on their core competency the hardware but that changed in 2015 with dieselgate the Scandal involving an emissions control system designed to fraudulently manipulate the results of emissions test S as part of the ensuing legal settlement the company invested $2 billion into building out the Electrify America brand of EV fast Chargers in North America and then $40 billion into their EV program and as for the software that ran those EVs and their entire fleet of vehicles for that matter well VW was going to do that too in 2019 the company announced that they no longer look for software suppliers but they'd be one no longer would they mirror the strategy of other Legacy automakers they take the Tesla route they'd be a car company and a tech company the vision was straightforward enough they'd radically simplify and there would no longer be any black boxes that the company itself couldn't understand under their hoods each of their cars leadership noted were using some 70 separate computers and across VW groups Brands there were eight separate software architectures now the company wanted to cut those numbers to three computers per car and one operating system across the entire group group while the concept was simple the undertaking was massive as VW group didn't even have a built out software Branch so they started from the ground floor founding a software and technology company now called carad here outside of Munich and an Audi plant with a host of additional offices extending as far as Seattle to house its 3,000 new employees now no Volkswagen brand would have to rely on outside software they'd have one in-house operating system serving their purposes alone just as soon as they built it this was a first a legacy car manufacturer so boldly embracing software GM hadn't made such a move neither had Ford nor Toyota nor had Honda or Hyundai neither had even Tesla who shared the most similar approach to software as Tesla from its founding was a software developer making software a core competency from the beginning but the problems were immediate while Volkswagen was able to begin delivering certain trims of its first modern electric vehicle the ID3 in China and Europe nearly on time the buyers were asked to patiently wait for software updates before their infotainment systems and heads up displays would be fully operational for the company's first electric car release in the much anticipated ID series it was a massive blender as Reddit and YouTube became replete with ID3 Rants and painful summaries of continued software snafus making matters worse in the same year software difficulties also delayed the release of the popular VW Golf as the company simply couldn't ensure Network safety in some markets for over theair updates while the launch of the electric id4 in North America went a bit smoother software soon proved the vehicle's Achilles heel as about a third of recall notices on the vehicle could be attributed to software problems unfortunately for the VW group kad's issues were more structural than simply stumbling out of the starting blocks issues for the ID group are largely attributed to kad's most rudimentary product E3 1.

1 the platform designed for the group's Mass Market EVS but cariad is in 2019 was also tasked with the concurrent development of two other platforms E3 1. 2 a step up in complexity designed for higher ndvs from the likes of Audi and Porsche as well as E3 2. 0 a software product that would usher in autonomous driving for the group in the late 202s carad struggled with these products too leading to delays on Porsche's EV Macon and more recently Audi's qh rron once again on account of software while Bentley counting on E3 2.

0 to Usher the brand into its EV era has already announced that its full transition away from internal combustion isn't likely until the mid 2030s in part because of uncertainty over whether kiad can deliver a reliable product from the beginning Kad was founded to become a central strength of the group so it's been Central in both near and long-term product road maps and because it has failed so spectacularly up until this point it's left the entire group from Mass Market to luxury in a state of uncertainty and Beyond the operational implications the end result is still not what it needs to be anecdotally the reviews indicate that while VW software might be improving it's still far behind that of byd or Tesla so now the company is in damage limitation mode along with the factory shutdowns it's aiming to cut pay by 10% across the board and has already finalized a plan to do so with managerial staff largely through a reduction in bonuses to avoid further Factory closures and pay cuts though the company needs to make some bold moves it's starting by trying to find the next China and VW believes One Prime Emerging Market opportunity is here in Brazil this is in fact where VW opened its first International Factory in the 1950s and today boasts four factories but the company still believes there's more juice to be squeezed it's aiming for 40% market growth by 2027 by introducing 15 new electric and flex fuel models to Brazil at the end of the day though VW still thinks it can salvage the Chinese market all they need to do is follow the lead of the new market leaders after plenty of public rhetoric on how they won't get coaxed into a price war with the Chinese manufacturers VW has been coaxed into a price war with the Chinese manufacturers and dropped prices across its lineup to build back market share recently it also introduced the ID code concept a fully electric vehicle equipped for fully autonomous driving developed specifically for the Chinese market with the kind of techy futuristic features that have helped Propel byd sales this includes a self-cleaning mode where the car uses UV light to purify the air and a built-in Robot vacuum cleaner to clean surfaces VW also took a 4. 99% ownership stake in Chinese EV startup xang by collaborating with an established in-market brand Volkswagen says it will cut production Time by 30% and production costs by 40% on the two models it plans to introduce with xang in 2026 But ultimately if vws are going to be competitive anywhere they're going to have to get good at software in July Volkswagen announced a joint venture with American Eevee darling rivan known for breaching the SUV and recreational vehicle markets the initial $1 billion investment will be followed by another $4.