In 1984, Volkswagen partnered with a Chinese automaker because it was required by Chinese law.
The German company is now partnering with Chinese automakers because it wants to use their technology.
The Volkswagen Group today maintains the initial joint ventures it entered into with Chinese automakers at the start of its foray into what has become the world’s largest auto market. But the fact that it now relies on companies such as Chinese electric vehicle maker Xpeng for hardware and software highlight how the balance of power in the auto industry is shifting toward the companies that produce these now high-value components. Chinese companies are proving they can do it faster, and often more cheaply, than anyone else.
The VW Group, which for much of the past decades has been a top-selling brand in China, has recently struggled to maintain its position.
Volkswagen’s profits in China fell about 45% in 2025, from about $2 billion to $1.1 billion. The company said in its annual report that it now faces intense competition from Chinese companies.
This is not a unique problem. Virtually all non-Chinese automakers are seeing their market share erode in the country as local companies create vehicles that more directly meet the expectations of Chinese customers.
In particular, Chinese buyers have a soft spot for what are often called “software-defined vehicles.” They are connected and updateable and essentially allow drivers to do everything through a car as they would through a phone.
“The Chinese owner of the vehicle can do their banking using voice commands or order takeout to meet them when they get home, or do any number of things that seem a little unusual to us here in the West, because we’re just not built that way,” said AutoForecast Solutions analyst Conrad Layson. “However, the Chinese buyer can’t do that in a Chinese-built Volkswagen, so he went where it was most convenient. He was able to take his digital life with him in and out of the car.”
Chairman and CEO of Chinese electric vehicle maker Xpeng He Xiaopeng visits the stand of German automaker Volkswagen during the IAA International Motor Show, September 8, 2025, in Munich, Germany.
Tobias Schwarz | AFP | Getty Images
VW’s struggles to create an in-house software division have been widely documented: after years of effort and billions spent, the company abandoned its standalone approach and turned to collaborations. Xpeng is a major partner in China, while in North America and elsewhere VW has partnered with Rivien to build cars.
Xpeng, which also makes its own vehicles, helped VW’s China division build a hardware and firmware architecture called CEA for the German automaker’s vehicles in the country.
In February, news broke that the VW Group would be the first customer of Xpeng’s VLA 2.0 automated driver assistance system. If it performs as advertised, it will match or exceed anything made by any other global automaker, Layson said.
Then, in March, the first vehicle co-developed by the two companies, the ID.UNYX 08, rolled off the assembly line.
The two companies brought the vehicle to production in 24 months, the CEA architecture in just 18 months. This is “unheard of in the West,” Layson said. “But for you, it’s China’s speed.”
Global automakers typically require a three- to five-year lead time for a new vehicle, or even a major refresh.
Rivian and VW are collaborating on pretty much the same things the German automaker is doing with Xpeng. The deal gave Rivian a roughly $6 billion lifeline at a time when the electric vehicle maker is ramping up production of its mid-priced, higher-volume R2 SUV.
Comparisons between the two companies indicate how far Chinese automakers have come, said Tu Le, founder of Sino Auto Insights, a company that studies the Chinese auto market.
Rivian, for example, is working on its own chips. Xpeng too, but its chip is already being manufactured.
“Xpeng is already there and Rivian wants to get there,” Le said.
Even though Xpeng has a technological advantage, its partnership with VW does not necessarily pose an immediate threat to Rivian – at least in North America, he added.
Trade conflicts and political tensions encourage automobile manufacturers to enter into these various partnerships. For example, the United States has banned certain types of Chinese software and hardware intended for connected vehicles.
The long-term situation is unclear. Xpeng, like all Chinese automakers, wants to compete globally, and not just through partnerships with other automakers. For example, on March 25, the company began selling two models in Mexico.
Companies such as Tesla, Rivien And Lucid engines are at the forefront of building these types of connected vehicles outside of China.
Still, if Chinese companies can prove that they can outpace Western companies in their home market and export these features to other markets, VW could face a difficult choice in the future.
“The question you should probably ask is whether they’re using the Rivian stack or the Xpeng stack in Europe, because we know they’re going to use Le said.
He added that the long-term risk for a company like Volkswagen – or Stellantiswhich has partnered with the Chinese automaker Leap Engine — is that they essentially become contract manufacturers, Le said. This would be achieved if high-value components such as software and technology that define the modern vehicle were increasingly manufactured in China.
“My question might be: If Xpeng is running at full capacity, will they even need the Volkswagen Group?” Le said. “The situation is reversed. And I think more and more people are starting to realize that this is real. Their products are important and they are a threat to our livelihoods.”
Neither Rivian, VW Group nor Xpeng responded to CNBC’s request for comment or interview.