Volkswagen ID.3 is one of Europe’s best-selling all-electric cars, with over 35,400 cars sold and costs around 40,000 to 45,000 euros in Europe, but what if I told you that same car costs less than half that amount in China.
Yes, it is true, a Volkswagen ID.3 costs around 15,800 to 18,900 euros in China, But Why?
The answer lies in the competition that is brewing up in China’s car market, especially for electric vehicles.
In fact it is so competitive that there are a total of 129 EV brands, but only 20 have a domestic market share of at least 1%, meaning other 109 electric car brands don’t even have a market share of 1%.
Now out of these 20, companies like BYD, Tesla and Wuling have the lion’s share of the market, with BYD having almost 33%, Tesla having over 8% and Wuling over 5% of China’s EV market.
Also Read: BYD vs Tesla: China’s EV Giant Challenges Elon Musk
And this is not the end of it, new players like Xpeng, NIO, Huawei (smartphone maker), Baidu (China’s Google i.e. China’s dominant search engine) and Xiaomi (smartphone maker) also want a slice of the world’s largest car market.
But what is even more surprising, Volkswagen once used to be a China’s best selling car brand and not that far back but in as recent as 2020 with a market share of around 20% but today in 2023, just 3 years later, it has lost the title to BYD.
But Why is Volkswagen and other Global Car Companies (like Toyota, BMW, Mercedes, Ford and others) all of a sudden starting to struggle in China’s Car Market? What are the challenges they are facing in the EV market? and the broader implications for the global auto industry.
Table of Contents
- The Rise of Volkswagen in China
- China Goes Electric: Rise of EV’s in China
- Why Traditional Automakers Struggled to Electrify?
The Rise of Volkswagen in China
Volkswagen took a calculated risk by entering into the chinese market in 1978, when a chinese delegation visited Germany looking for a partner in the automotive industry and a few weeks later negotiations between the Chinese government and the Volkswagen group, and finally signed a 25 year contract to make cars in Shanghai, China.
In 1984 Volkswagen launched its first joint venture in China – the SAIC Volkswagen Automotive Company Limited.
Meanwhile, China was emerging from the Cultural Revolution and was embracing the economic reforms which led to its opening doors to foreign investment and personal incomes saw a sharp rise and this newfound wealth fueled a growing desire for private car ownership.
And on September 1, 1985, the joint venture launched its first car Santana which became a huge success and seeing this Volkswagen launched 2 more joint ventures in China. In 2004, it established Volkswagen Group China, which today employs more than 100,000 people and has manufacturing plants at around 20 sites in China making brands like Volkswagen, Audi and Skoda.
Overall, Volkswagen cashed in on the rising wave of economic growth in China and got the first mover advantage by entering the market early and was able to become a household name in China.
China Goes Electric: Rise of EV’s in China
China became the world’s largest car market by 2009 and in 2012 it also became the world’s largest producer of carbon emissions.
Recognizing the growing urgency of environmental concerns, the nation’s dependence on fossil fuels, and the potential to become a global leader in clean energy, China’s government in 2009 began implementing its New Energy Vehicle (NEV) Program, in order to support the then emerging electric vehicle industry. Under this policy the government gave incentives and subsidies to EV buyers and manufacturers.
And today, China’s EV market is the biggest in the world and accounts for about 58% of Global EV production and is expected to grow at about 18% from 2023 to 2028.
The man behind this incredible transformation was Wan Gang, a former auto engineer and an advocate for sustainable transportation. Wan was appointed as China’s Minister of Science and Technology in 2008 and under his leadership, Significant government funding was directed towards research and development in battery technology, electric motors, and overall EV design.
Generous subsidies were offered to both EV manufacturers and consumers and this financial backing not only helped to offset the initial higher costs of EVs but also stimulated consumer demand.
However, there was one problem for China to become an EV hub: Range Anxiety, a fear of running out of battery before reaching the destination and to address this issue, the government launched a nationwide initiative to build charging stations across the country. This strategy proved remarkably successful – China now has the most extensive EV charging network globally, with over 800,000 stations established by the end of 2023.
Once the government was successful in creating a vibrant ecosystem for EV companies, Chinese startup’s like BYD, Nio, and Xpeng stepped up to capitalize on government support and favorable policies to develop cutting-edge EV technologies and bring innovative electric vehicles to the market.
Why Traditional Automakers Struggled to Electrify?
Traditional automakers Such as Volkswagen, Hyundai and Toyota have decades of experience in car manufacturing and design but the one thing where they lack is the software development and technology.
Unlike the ICE (Internal Combustion Engine) Vehicles, EVs are nothing but a computer on wheels with software playing a crucial role in everything from battery management and driving dynamics to advanced driver-assistance features and the overall in-car experience.
And here is where companies like Volkswagen failed with their ID.3 hatchback. Chinese consumers are accustomed to a seamless tech experience and Buggy software and ugly user interface is the last thing they would buy.
In China, consumers place more importance on the software, digital connectivity and tech-driven experience unlike in European and American markets, where driving performance might be the top priority.
Features such as voice-activated controls that understand Chinese, in-car entertainment systems with karaoke capabilities and seamless smartphone integration are purchase criteria for many. These features, which are often lacking in foreign electric cars, are easily available in Chinese electric cars.
And It isn’t just about copying existing features either. Chinese consumers have become accustomed to constant software updates and upgrades that allow their cars to evolve over time and traditional automakers, on the other hand, are accustomed to a more static development cycle for the gas-powered vehicles and are simply unprepared for this level of agility.
So in conclusion, the future of traditional car companies in China and maybe elsewhere in the world will depend on how well they can adapt to the new way of doing things and past successes like Volkswagen’s no longer mean anything.