In 1984, volkswagen The company partnered with a Chinese automaker because Chinese law required it.
German companies are currently partnering with Chinese automakers and hope to use their technology.
The Volkswagen Group currently maintains its original joint venture with a Chinese automaker early in its expansion into what has become the world’s largest car market. However, the fact that we are currently dependent on companies such as Chinese EV manufacturers Spen This research into hardware and software highlights how the balance of power in the automotive industry has now shifted towards companies that manufacture high-value components. Chinese companies are proving they can do it faster and often cheaper than others.
VW Group has been China’s best-selling brand for decades, but has struggled to maintain its position in recent years.
Volkswagen’s profits in China fell by about 45% in 2025, from about $2 billion to $1.1 billion. The company said in its annual report that it currently faces intense competition from Chinese companies.
It’s not a special problem. Essentially, all non-Chinese automakers are seeing their market share eroded in China as their companies develop cars that directly respond to the demands of Chinese customers.
In particular, Chinese buyers prefer what are called “software-defined vehicles.” They are connected and updatable, and essentially allow drivers to do everything in their cars that they would do on their phones.
“Chinese car owners can use voice commands to do banking transactions, be greeted at home and order takeout, and do all sorts of things that seem a little unusual to us here in the Western world, because we just aren’t equipped to do that,” said AutoForecast Solutions analyst Conrad Leyson. “But Chinese buyers couldn’t do that with a Volkswagen made in China, so they went where it was convenient. They could bring their digital life into the car and out of the car.”
The chairman and CEO of Chinese EV manufacturer Xpeng He Xiaopeng visited the booth of German automaker Volkswagen during the International Motor Show IAA held in Munich, Germany on September 8, 2025.
Tobias Schwartz | AFP | Getty Images
VW’s own struggles to build an in-house software department have been widely documented, and after years of effort and billions of dollars, the company abandoned its proprietary approach and pivoted to collaboration. Xpeng is the main partner in China, while VW is partnering in North America and other regions. Rivian to make cars.
Xpeng, which also makes its own vehicles, helped VW’s China unit build a hardware and firmware architecture called CEA for the German company’s vehicles in the country.
In February, news broke that VW Group would be the first customer for Xpeng’s VLA 2.0 autonomous driving assistance system. If it performs as advertised, Rayson said it will match or exceed anything made by other global automakers.
In March, the ID.UNYX 08, the first vehicle jointly developed by the two companies, rolled off the assembly line.
The companies moved the vehicle into production in 24 months, and the CEA architecture was completed in just 18 months. This is “unprecedented in the West,” Leyson said. “But that’s China speed for you.”
Global automakers typically require a three- to five-year timeline for new vehicles or major refreshes.
Rivian and VW are collaborating on much the same thing the German automaker is doing with Xpeng. The deal gives Rivian a lifeline of about $6 billion as the EV maker ramps up production of its mid-priced, higher-volume R2 SUV.
Tu Le, founder of Sino Auto Insights, a company that researches China’s auto market, said the comparison between the two companies shows how far Chinese automakers have come.
For example, Rivian is working on its own chip. Xpeng is similar, but its chips are already in production.
“Xpeng is already there and Rivian wants to get there,” Le said.
He added that while Xpeng has a technological advantage, a partnership with VW doesn’t necessarily pose an immediate threat to Rivian, at least in North America.
Trade disputes and political tensions are driving automakers to form these various alliances. For example, the United States has banned certain types of Chinese software and hardware for connected cars.
The long-term outlook is uncertain. Xpeng, like all Chinese automakers, wants to compete globally and not just partner with other automakers. The company began selling two models in Mexico and other countries on March 25th.
companies such as tesla, Rivian and lucid motors is at the forefront of building this type of connected car outside of China.
Still, if Chinese companies prove they can outperform Western companies in their home market and export their capabilities to other markets, VW may face tough choices in the future.
“The question you should probably ask is, are they going to use the Rivian stack in Europe or the Xpeng stack? Because we know they’re going to use Xpeng in China, and we also know that for the time being they’re going to use the Rivian stack in North America. But ultimately, which one is better and which one is probably more robust and more appropriate?” Lu said.
He believes there are long-term risks for companies like Volkswagen, or Stellantispartnered with a Chinese automaker leap motor — meaning they essentially become contract manufacturers, Lee said. That will happen as more and more high-value components, such as the software and technology that define modern cars, are manufactured in China.
“My question might be: If Xpeng develops all cylinders, will Volkswagen Group also be needed?” Lu said. “Shoes are in the opposite position. And I think more and more people are starting to realize that this is the reality. Their products are important and they are a threat to our way of life.”
Neither Rivian, VW Group nor Xpeng responded to CNBC’s requests for comment or interviews.
