Volkswagen Plans to Bring China-Developed Models to German Production to Tackle Overcapacity and Falling Profits

On July 9, 2024, Volkswagen Group submitted a restructuring plan comprising 12 measures to its Supervisory Board at its headquarters in Wolfsburg, Germany. The plan aims to reduce its global vehicle lineup by up to 50% and cut optional configurations by up to 75% by 2030, while scaling down annual global production capacity to approximately 9 million vehicles. Initial measures have already been launched, covering adjustments to model portfolios, technical platforms, production networks, management layers, and investment strategies. Specific arrangements regarding plant closures and workforce reductions have not yet been finalized. According to previously disclosed information, Volkswagen’s management is evaluating the potential closure of four German plants: Hanover, Emden, Zwickau, and Audi’s Neckarsulm facility. Combined with existing workforce reduction plans and role reallocations, the group could eliminate nearly 100,000 jobs globally—roughly 15% of its total workforce. This move is intended to address persistently weakening profitability: in Q1 2024, Volkswagen Group reported revenue of €75.66 billion, down 2.5% year-over-year; operating profit fell 14.3% to €2.46 billion; and global deliveries declined by 4%. Deliveries in China dropped by 15%, and operating profit contributed by joint ventures plummeted nearly 70%, from €2.72 billion a year earlier to just €830 million. Volkswagen faces dual pressures in Germany: declining factory utilization rates and insufficient product competitiveness. Although the European EV market continues to grow—with battery-electric vehicle (BEV) registrations in Germany reaching 70,700 units in March 2024, up 66.2% year-over-year and surpassing gasoline cars for the first time—Volkswagen has failed to timely launch new electric models aligned with market demand. In the same period, BYD registered 3,438 vehicles in Germany, a surge of 327.1% year-over-year. Surveys indicate that only 24% to 31% of German consumers aged 18–35 are unwilling to buy Chinese-branded cars, with some segments showing even stronger resistance toward domestic brands. To accelerate product renewal, Volkswagen has established a China-based R&D system independent from its German headquarters. Volkswagen Automotive Technology Co., Ltd. (VCTC), located in Hefei, employs over 3,000 engineers and possesses end-to-end capabilities—from product definition and platform development to software integration and full-vehicle validation. Built on two localized platforms—the CMP (co-developed with XPeng) and CSP (Volkswagen-led)—and leveraging China’s Electronic Architecture (CEA), this system can shorten development cycles by around 30% and reduce costs for certain projects by up to 50%. In response to idle capacity at German plants, Lower Saxony Minister-President Olaf Lies proposed producing China-developed models in Germany to boost utilization rates and preserve jobs. Volkswagen has initiated internal feasibility studies to assess the economic viability of such a move. Potential candidates include the ID.Era 9X, a range-extended SUV co-developed with SAIC Motor, and a new SUV based on the CSP platform, sized similarly to the Touareg. The latter is internally favored due to Volkswagen’s full control over its core technologies and could enter the European market as early as late 2027. However, the plan faces multiple challenges. CFO Arno Antlitz remains cautious about introducing China-developed models with high partner technology content, stressing that products originating from “completely unrelated competitors” should not be branded as Volkswagen or marketed under the “Made in Germany” label. Fitch Ratings noted that while China-developed vehicles hold potential for technological replication, significant adaptations would be required in software, driver-assistance systems, regulatory compliance, and supply chain localization—making widespread adoption a medium- to long-term endeavor. Cost remains a critical constraint. Although R&D costs in China are roughly 40% lower than in Europe, shifting production to Germany would erode price advantages due to high labor, energy, and operational expenses. Additionally, supply chain components such as batteries and electronic parts face similar localization pressures. Volkswagen’s complex decision-making structure and strong labor representation further complicate restructuring and production relocation efforts. If new models undergo Europe’s traditional approval processes, the “China speed” cannot be replicated. To maintain efficiency, Volkswagen must also transfer decision-making authority, supplier collaboration models, and software development methodologies. Resistance also stems from unions and Germany’s engineering culture: product definitions led by Chinese teams could undermine Wolfsburg’s technical leadership, while adopting Chinese electronic architectures and suppliers might threaten local R&D roles and disrupt established industrial interests. Historically, the 1983 rollout of the Santana in Shanghai symbolized one-way technology transfer from Germany to China. Today, the flow of technology shows signs of reversal. Volkswagen must now prove that vehicles developed by its Chinese team can remain competitive under European regulations and Germany’s cost structure. Only sufficient sales volume and profitability will alleviate the existential crisis facing its German factories.