Volkswagen’s China crisis: Can the German giant survive the EV price war?

Volkswagen’s decades-long reign as China’s favorite foreign automaker has come to a crashing halt.

After leading the Chinese market for 40 years with models that ranged from budget-friendly Santanas to high-performance Audis, the German automaker has been dethroned by domestic electric vehicle (EV) giants like BYD. 

Subsidies, price cuts, and policy shifts are leaving Volkswagen struggling to maintain its foothold in China, a market now leaning heavily towards state-backed EVs.

Why Chinese consumers are choosing local EV brands over Volkswagen
For years, Volkswagen’s vehicles symbolized quality and status for Chinese consumers. But today, that image is rapidly fading. 

BYD and other Chinese automakers have captured the market’s attention, particularly through innovative EV technology and aggressive pricing tactics. While VW was once synonymous with reliable, well-engineered cars, Chinese consumers now see the brand as representing the past.

“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.”

As the competition heats up, Volkswagen finds itself grappling with the fallout from an intense price war and a rapidly shifting consumer base that prefers homegrown, high-tech EVs over traditional gasoline-powered vehicles.

How China’s state-backed price war is squeezing Volkswagen and other foreign automakers
One of Volkswagen’s biggest challenges in China is the ongoing price war among EV manufacturers. Chinese state-owned banks and local governments have been heavily subsidizing domestic EV makers, allowing companies like BYD to sell their cars at massive discounts, sometimes up to 50% below production costs. Volkswagen, however, has been unwilling to match these aggressive price cuts.

“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.”

This decision has led to a 10.2% drop in VW sales in China in just the first nine months of the year, which has effectively wiped out gains made in all other markets.

Volkswagen’s EV strategy missteps in China
In a market increasingly favoring hybrid and electric options, Volkswagen has been slow to adapt its lineup. While companies like BYD have built an extensive range of plug-in hybrids that appeal to Chinese buyers seeking flexibility, VW only recently committed to expanding its hybrid offerings. 

The delay means Volkswagen is effectively shut out of the plug-in hybrid market until the end of next year—a costly gap as China’s demand for such vehicles continues to grow.

To make up for lost time, VW has taken stakes in companies like Xpeng, a Chinese EV manufacturer, hoping to accelerate the production of competitive electric models. But even as VW attempts to speed up its transition, it’s grappling with competition from both BYD and Tesla, who already have substantial market shares and entrenched production facilities.

Political complications in Xinjiang damage VW’s image
Volkswagen’s struggles in China go beyond market competition as political challenges compound its issues. VW’s presence in Xinjiang—a region at the center of human rights concerns over the treatment of Uyghur Muslims—has drawn criticism from global human rights organizations and created tensions with Western regulators.

Built a decade ago, VW’s factory in Urumqi, Xinjiang’s capital, was meant to produce low-cost gasoline-powered cars for western China. However, production stopped in 2019 due to weak demand, and the plant now sits largely idle, with only a skeleton crew of 190 workers preparing vehicles for delivery.

This association with Xinjiang has made Volkswagen a target for international scrutiny, particularly in light of accusations around VW’s alleged use of forced labor. While VW has denied these allegations, overseas activists have continued to call for greater transparency. 

Efforts by VW to commission a third-party audit in Xinjiang to verify compliance with labor standards were criticized for failing to adequately protect workers’ anonymity.

Additionally, VW’s reliance on its Chinese partner, SAIC, a state-owned company closely aligned with the Chinese government, complicates the situation. Leaving Xinjiang isn’t easy, especially given China’s ongoing pressure on foreign companies to remain invested in the region. 

VW remains in a tricky position: the company’s human rights record in Xinjiang is hurting its reputation in the West, but withdrawal is nearly impossible without upsetting its Chinese partners.

New import tariffs threaten Volkswagen’s Chinese EV imports
Volkswagen’s troubles in China aren’t limited to domestic production. To keep up with demand, VW began exporting Chinese-made EVs like the Cupra Tavascan to Europe. But a new layer of import tariffs from the European Commission, intended to counteract China’s EV subsidies, has hampered these exports.

Last week, the European Commission began imposing a 37% tariff on all EVs that VW is importing from China—a penalty for European automakers who failed to comply with the commission’s investigation into Chinese subsidies. VW’s lack of cooperation initially resulted in the highest tariff rate, though it later managed to negotiate a reduction to 21%. Despite this, VW remains at a disadvantage compared to competitors like Tesla, which is subject to only a 7.8% tariff, and BYD, which faces a 17% rate.

This disparity in tariffs puts VW in a challenging position in its own backyard. With Chinese-manufactured EVs now significantly more expensive to import, VW may struggle to compete with Tesla and BYD on pricing in Europe—a crucial market where it hopes to grow its EV sales.

Final thoughts
Volkswagen’s sales woes in China have wide-reaching implications. The brand’s shrinking market share in China means its global sales are suffering, with the company looking to quickly cut costs through layoffs, wage cuts, and factory closures in Germany.

Volkswagen’s position in China, once seemingly unshakeable, has been undermined by a combination of economic, political, and competitive forces. From aggressive state-sponsored EV price cuts to complex geopolitical issues in Xinjiang, VW faces an uphill battle to regain its footing in a market it once led. Whether it can navigate these challenges and re-establish its presence remains to be seen.