VW’s EV Shortcut in China Could Make Rivals Rethink Strategies

Volkswagen has adopted a relatively quick approach to entrenching itself in China, the world’s largest market for electric vehicles. Rather than setting camp in China and building local manufacturing facilities such as Tesla did, Volkswagen has opted to invest in Chinese automaker XPeng gain a foothold in the eastern Asian market.

The German carmaker will invest $700 million in Guangzhou, Guangdong-based EV maker Xpeng, a “shortcut” that will grant the company access to Xpeng’s electric vehicle technology and could potentially accelerate Volkswagen’s entry into the largest EV market on the globe. Volkswagen launched its flagship ID series in China two years ago but struggled to gain a foothold in the Chinese market in what experts called a “worryingly slow start.”

Volkswagen sold only 1,213 units of its two ID.4 electric SUVs in May 2921 and less than 200 in April, auto consultancy company LMC estimates, falling far short of the German automaker’s sales projections. Delays in the company’s software unit Cariad have also pushed back Volkswagen’s schedule for new products.

Investing in a local automaker that specializes in EVs may be a faster way for Volkswagen to capture a portion of China’s massive electric vehicle market. The $700 million investment will grant Volkswagen a 5% stake in Xpeng as well as a seat on the board. Most importantly, it will allow Volkswagen to access next-generation electric vehicle software. The partnership will also allow Volkswagen to develop new EV designs leveraging Xpeng’s underlying structure for EVs, enabling it to equip its EVs with more features. The German carmaker has tentative plans to launch two new EV models in China by 2026, more than two times faster than the average five years it takes to launch a product in a fresh market.

If Volkswagen’s gamble pays off, other Western automakers may rethink their strategies for entering the Chinese EV market. Carmakers such as Tesla and BMW, which are enjoying high sales, are facing increasing competition from local startups and established companies such as BYD, which has partly contributed to an ongoing discount war.

Furthermore, vehicle sales in China seem to have peaked in 2017, and supply has far surpassed domestic demand for vehicles. With more than a dozen vehicle companies jostling for space in the country, foreign automakers looking for a share of the Chinese market will have to face fierce local competition. Partnering with domestic companies may be the fastest way to corner the Chinese market before it becomes too saturated.

As the competition in major EV markets such as China climbs to a new level, manufacturers such as Lucid Motors (NASDAQ: LCID) may have to act fast or look for alternative markets to dominate.

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