On an overcast day last September, French race car driver Romain Dumas steered a very strange car up the side of Tianmen Mountain, in the southern Chinese province of Hunan. His fully electric, Volkswagen ID.R prototype — a carbon-fiber rocket with a rear wing like an orca’s tail — was so fast it had caused test drivers to black out, and it howled like a banshee around 99 hairpin turns on a route 6.78 miles long and 4,200 feet high.

Seven and a half minutes had passed when Dumas reached Tianmen’s spectacular natural stone arch, “Heaven’s Gate” — a record by almost three minutes. It was the equivalent of climbing San Francisco’s Lombard Street at 54 mph, but with sheer drops rather than carefully-trimmed yards at the shoulders. 

Dumas, a veteran of Le Mans and the Paris-Dakar Rally, thought Tianmen was his “most spectacular outing.” But it was more PR than Grand Prix. The ID.4 is the ultra-light, 670-horsepower vanguard of a Volkswagen fleet that the German firm claims will be entirely electrified by 2030. Volkswagen plans to roll out 50 new battery- and 30 new hybrid- models in the next few years, and eventually, all 300 models in Volkswagen’s 12-brand stable will have electric editions.

Dumas’s feat at Tianmen Mountain, VW China chief Stephan Wöllenstein said, “gives customers an exciting outlook for our fully-electric future.”

Volkswagen, which has annual revenue of $307 billion, has committed $91 billion to electric vehicles by 2025 — double that of Daimler and 12 times GM. But the company believes its electric future will be “decided in the Chinese market,” as CEO Herbert Diess said last year, which is why half of that investment is destined for China, with an additional $17 billion in funds flowing to the firm’s Chinese partners. 

It is little wonder why. Last year, electric vehicles, or EVs, comprised 5 percent of China’s car sales. But by 2025, President Xi Jinping wants that figure to rise to 20 percent. If industry growth continues at its current pace, China will buy nearly 50 million EVs 14 years from now — almost as many as the entire planet’s car industry today. 

But even with the Middle Kingdom’s thirst for electric cars, Volkswagen faces an uphill battle. The world’s largest automaker must pivot swiftly from combustion engines to electric motors, all while startups like Tesla and Chinese brands are gaining ground. Moreover, VW’s operations in China bring up difficult political decisions for Berlin. VW China employs 100,000 people at 33 plants — including, controversially, one in the Xinjiang capital city of Ürümqi. The German government is considering legislation that could place its biggest company under far greater scrutiny.

Moreover, while VW’s China operations are “very attractive for Volkswagen’s stockholders,” says Max Zenglein, chief economist at the Berlin-based Mercator Institute for China Studies (MERICS), the “impact on protecting or creating European jobs, is questionable… 95 percent of the vehicles Volkswagen sells in China are made in China. And nearly all the profits they make in these joint ventures are reinvested in the Chinese market.”

Michael Dunne, the CEO of ZoZoGo, a consultancy expert in Asia’s electric car markets, agrees. “Take away the China business and VW drops instantly from a powerhouse among global automakers to an also-ran.” That, he adds, helps explain the make or break strategy.

And like many companies struggling with the prospect of “economic decoupling” from China, Volkswagen’s vision of the future may collide with the realities of its past. Tu Le, a Beijing-based consultant, says that when it comes to EVs, if the world’s leading automakers “can’t do it in China, they are likely screwed.” 

Dumas’s hair-raising ascent up Tianmen Mountain may have been a record, in other words, but Heaven’s Gate is still a long way from Wolfsburg.

FROM YIBU, YIBU TO DISRUPTION

It was 1978 — the year of the horse — when China’s car obsession began. Mao’s successor, Deng Xiaopeng, issued sweeping reforms to modernize and opened diplomatic relations in the West. The Federal Republic of Germany — which had been cleaved from a socialist, Cold War neighbor — attracted special attention as Chinese officials marveled at Volkswagen’s vast Wolfsburg Werke, the largest factory on earth, situated in north Germany. Within weeks, they had negotiated a deal to make Volkswagen cars back home.

In 1984 Volkswagen became the first foreign Original Equipment Manufacturer, or OEM, to establish production on Chinese soil. Granting access to the domestic market through joint ventures, Deng hoped, would force western firms to transfer skills and technology.

The Shanghai Volkswagen Automotive Company (SVAC) was a joint venture between VW and China’s biggest car manufacturer, the Shanghai Tractor Automobile Corporation (later known as SAIC).¹VW owned half of SVAC; STAC owned 25 percent; the Bank of China another 15 percent; and China’s automotive umbrella organization the remaining 10 percent. The SAIC stands Shanghai Automotive Industry Corporation.

In 1985 the first car rolled off SVAC’s assembly line. The Santana, a four-door sedan, flopped in Germany. But China loved it. At the time, the country had just half a million miles of road (the U.S. had four times that in 1916), but its 1,700 Santanas², just 0.1 percent of VW’s global output was a solid start in a nation mechanizing at a frantic pace.

In 1988 China’s first “expressway” connected downtown Shanghai with the suburb of Jiading, 11 miles northwest and right beside Volkswagen’s plant, which was now making 15,000 vehicles a year. Just one in 2,200 Chinese citizens had a car, but Volkswagen’s annual report that year included a special China feature eyeing the potential of a market 38 times the size of West Germany. 

“Happy, smiling faces are to be seen everywhere and the famed hospitality of the Chinese people is very much in evidence,” gushed the VW report.

Indeed, China’s yibu yibu (“step by step”) work culture paired well with German long term planning, and Volkswagen signed a second joint venture with First Automobile Works (FAW), a firm based in Changchun — “China’s Detroit.” FAW had built China’s first passenger car in 1958: the Hongqi (‘Red Flag’), a barge-sized icon that ferried Chinese Communist Party elites between engagements. VW picked the firm to produce its more upmarket Audi 100, whose Bauhaus looks made it the whip du jour of Beijing bureaucrats.

The state-owned enterprises basically sat there and collected rent. They didn’t contribute anything.

Fatih Oktay, professor of Chinese economy and politics at Koç University, Turkey

By 1993 FAW was making 50,000 Audi 100s. SVAC’s output, meanwhile, of 100,000 Santanas made it China’s biggest automaker, and dominated the market even after General Motors entered in 1997. By the time China joined the World Trade Organization in 2001, VW’s joint ventures were selling 500,000 units — far more than VW managed in the U.S. The only nation buying more of its vehicles was Germany.

“They were a phenomenal success story from the get go,” says Dunne of ZoZoGo, noting that when other global automakers were reluctant, VW “went all in,” even after some global firms stepped back in the aftermath of the Tiananmen Square massacre in 1989.

But while Volkswagen’s early gamble was paying off, Deng’s strategy was flailing. By 2014, foreign OEMs still made the vast majority of cars on Chinese roads. 

“The state-owned enterprises basically sat there and collected rent. They didn’t contribute anything,” says Fatih Oktay, professor of Chinese economy and politics at Koç University, Turkey.

President Xi Jinping wanted to change that. In 2015, he made electric vehicles a cornerstone of his “Made in China 2025” plan — a strategy that combined his effort to turn China’s cheap labor economy into a high-tech hub with Beijing’s ongoing war against air pollution.³In 2010 China’s air pollution claimed 1.2 million premature deaths, 40 percent of the global total.

Xi ordered underlings to ditch Audis for Chinese cars, and traveled himself in an updated Hongqi. Beijing also sped up the development of software and batteries, and strangled the global supply of rare-earth minerals to power them. Innovation wasn’t just traveling west to east any more. Domestic brands like BYD and Dongfeng queued alongside a host of startups — Xiaopeng, Li Auto, NIO and others — in the race to supply Xi’s electric vehicle revolution. 

Volkswagen tried to keep up. In 2013, seeing the writing on the smog-covered wall, Volkswagen’s Chinese partners pledged $32 billion to a production boom, and Wolfsburg threw an electric motor in its famed Golf hatchback. 

But when Xi fired the EV starting gun, Volkswagen was distracted by a combustion engine mess in the west. In 2015, U.S. regulators discovered the firm was duping emissions tests. “Dieselgate,” as the controversy came to be known, was a global embarrassment, costing VW $36 billion and forcing a host of executives, including CEO Martin Winterkorn, to step down.

In retrospect, however, the debacle may have been a blessing in disguise. Days after it broke, then-brand chief Diess assembled executives for a Saturday crisis meeting at Wolfsburg’s Rothehof guesthouse. They discussed a future away from diesel entirely, and emerged with a different vision for their firm.

“If they hadn’t had Dieselgate the old management would go on and try to sell combustion engines, combustion engines, combustion engines,” says Ferdinand Dudenhöffer, director of the Duisburg-based Center Automotive Research. “That would be at very high risk to fail in China, but also in Europe.”

Dieselgate barely registered in China, and VW’s strong foundation in the country allowed it to pivot fast. The firm began piling cash into EVs. In 2017 it signed a 50:50 partnership with JAC Motors, based in the eastern province of Anhui — its first full-electric pairing. The ID series — featuring the ID.R and a funky update of VW’s iconic Camper — soon followed. In 2018 the group founded Mobility Asia, an AI and connectivity division.

“VW Group is the only company that’s said: ‘We’re going to be super aggressive about this. We’re not going to carefully dial down production of internal combustion engines so that we can maintain revenue in order to pay for this future investment,’” says Le, the Beijing auto consultant. 

The bold strategy is helped by the fact that Chinese consumers know and trust Volkswagens. Its stable of brands, including Audi, Porsche, Scania and Bentley, sell 11 million cars a year, with 4.2 million sold in China. This base bodes well for its EV prospects, and its Chinese partners are among the best. Ford’s Chinese partner, for instance — Chang’an Auto — has been on the wane for years, while BMW partner Brilliance defaulted on $149 million of bonds this year and faces bankruptcy. 

Still, as one of the world’s oldest automakers, VW’s transition won’t be easy. In 2016, Volkswagen recalled thousands of e-Golfs over a software issue. Last year the launch of its ID.3, a slinky mini-SUV that it hoped would lead the ID range, was delayed when software failed.

“German engineers, they can’t do user experience, they can’t do customer journeys, they don’t know how to do that,” says Le. “Because at the end of the day, it’s just a screen and a button.”

China, on the other hand, has no shortage of software engineers. Its EV start-ups are agile, light on staff, and prioritize “user experience” — and it seems to be working. NIO, founded in 2014, sold 12,000 vehicles in the third quarter. Six-year-old Xpeng shipped similar numbers, an increase of 342 percent from November 2019.

These young firms, however, face a catch-22: they must scale fast to satisfy shareholder pressure. Without a proven track record in China, it will be difficult to sell elsewhere. Moreover, OEMs will try to drown them out by flooding the market with a wider range of vehicles. VW now has the ID.3 and larger ID.4 in production, part of a seven-car EV fleet to roll out in the next two years.

If VW can stay ahead of the Chinese start-ups, it can focus on its real mission: surpassing Tesla. 

In June, the California firm became the world’s most valuable automaker, and its Shanghai Gigafactory — China’s first fully foreign-owned car plant — just delivered 7,000 mid-range Model 3 sedans to the EU. Founder Elon Musk has promised a cheaper Model 3 for the Chinese market, whose key battleground is in the $30,000 to 45,000 price range.

VW’s plan to catch Tesla — called “Mission T” internally — includes shedding combustion-era flotsam. Volkswagen is in talks to sell supercar brand Bugatti to Croatian EV specialist Rimac, for example. Lamborghini, Bentley and Ducati, a motorcycle brand, may soon be up for sale. 

If recent moves are any indication, the cash influx would likely be put towards the twin pillars of EVs: batteries and software. This May, VW paid $2.6 billion to increase its stake in JAC, and put an additional $1.3 billion towards a 27 percent stake in the Chinese battery maker Guoxan. Since July 2018 the German firm has made 11 strategic investments in China, including partnerships with Huawei and Didi Chuxing, China’s largest ride-hailing service. It has also dedicated 3,000 employees to a new software division that will help create a proprietary operating system and the AI to power driverless cars. Audi boss Markus Duesmann, meanwhile, will steer an incubator called Artemis to experiment with new tech outside VW’s corporate structure.

“VW has to change utterly,” wrote VW CEO Diess in a November op-ed, “from a collection of valuable brands and fascinating combustion-engine products that thrill customers with their superb engineering, to a digital company that reliably operates millions of mobility devices worldwide, communicates constantly with customers and improves services, comfort and safety.” The company’s size and combustion knowledge, he adds, “are no protection in times of dramatic upheaval, and may even be a burden.”

Volkswagen — an 87-year-old corporation — must now behave like a startup: shed weight and move faster. The days of yibu yibu are long gone.

THE BERLIN BARRIER

Even if Volkswagen can transform itself into the mobility startup China wants, however, it may face a bigger challenge at home. For decades German politics has trodden carefully in China. German trade leaders hail Beijing as systemrelevant (‘systemically relevant,’ or essential) and have distanced themselves from the Trump administration’s trade war. Since 2017 German media frequently describes Germany’s relationship with China as abhängig (‘dependent’).

This year, under German presidency, the EU has pushed for a Comprehensive Investment Agreement (CAI) with Beijing, with which it hopes to achieve “level playing field” access to the Chinese market. Angela Merkel, said to be the deal’s driving force, has visited China 12 times. Outside Europe, only the White House has welcomed her more during her 15 years in the role.

But the CAI, now in its sixth year⁴ and 34th round of negotiations, is becoming a Beckettian farce, doomed by the belief it can change the DNA of domestic Chinese economics. Even BDI, Germany’s largest trade group, has warned German businesses of price dumping and tech transfer, and last year urged Beijing to “open its domestic market and properly implement its long-announced economic reforms.”

Moreover, Merkel steps down as German chancellor next September amid growing public concern over Xinjiang and Hong Kong, for example. Though her successor will likely be a conservative — such as Bavarian premier Markus Söder or Armin Laschet, from the industrial powerhouse of North Rhine-Westphalia — the new chancellor will likely face coalition rule with the ascendant Greens, who have adopted the hardest line on China of any mainstream German political party. 

With the Greens in power, a supply chain bill — due for introduction next month — should pass. The bill was devised to combat malpractice in the garment industry, but automakers could also fall under its eye. Volkswagen, Daimler and BMW all have presences in Xinjiang, where Beijing forcibly interns the region’s Uighur Muslim minority. 

If the Chinese government did anything that would hurt the Volkswagen Group in China, it would almost be cutting their nose off to spite their face. But don’t get me wrong: the country is first in Chinese government priorities. They’d still do it.

Tu Le, a Beijing-based consultant

Volkswagen’s Ürümqi plant, which makes Santanas and Tharu SUVs, has come under particular scrutiny, given the firm’s roots in Nazi Germany. Allegations that VW has maintained ties with, and even supplied vehicles to, the People’s Armed Police, a paramilitary unit responsible for apprehending Uighurs, have further outraged a nation reckoning with its murderous past.

“Germans like to see themselves as human rights defenders, but when it comes down to it, Germany often chooses car sales over values,” says Marcel Dirsus, a fellow at the Institute for Security Policy at Kiel University. “Companies operating in Xinjiang grant legitimacy to a regime that’s running a dystopian surveillance state and a massive gulag system for ethnic minorities.”

“That would be shameful for any Western company, but the optics are particularly awful for a firm with VW’s history,” he adds. “So far, the pressure in Germany has been limited but that may change as consumers and politicians focus more on corporate responsibility, Xinjiang and Beijing’s crimes.”

CEO Diess claimed last year that he was “not aware” of reporting on the detention camps in Xinjiang. But VW China chief Wöllenstein told the BBC this November that he could not “reach 100 percent certainty” that the firm wasn’t complicit in human-rights abuses. (VW China declined repeated requests for an interview.) 

An official at the VDA, Germany’s auto industry association, dismissed the supply chain law as “well-meant” but “wrong,” and stressed a mantra of Wandel durch Handel (‘Change through Trade’).

But it is a minority view. “I don’t think they care too much about the Wandel, just the Handel,” says Rhodium Group expert Noah Barkin. “I don’t know if anyone really believed that China was going to turn into a flourishing democracy.” 

If the supply chain bill passes, Volkswagen may be pressured to choose: Stay in Xinjiang and risk censure from Berlin, or pull out and risk a retaliatory sanction from Beijing. 

“If the Chinese government did anything that would hurt the Volkswagen Group in China, it would almost be cutting their nose off to spite their face,” says Le, citing the number of VW employees in China. “But don’t get me wrong: the country is first in Chinese government priorities. They’d still do it.”

While China is undoubtedly systemrelevant for Volkswagen, whether it’s reciprocated is still in question. The road ahead is sheer, and the German giant needs to get leaner, nimbler and politically sound enough to reach another summit in record speed — this time without a flying Frenchman at the wheel. 

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