Hefei, China. Volkswagen is making a major bet in China, the largest and one of the most cutthroat auto markets in the world. The question is whether it will work.

The German carmaker, which once dominated the market with a more than 50 percent share, has invested 3 billion euros ($3.5 billion) in a sprawling research and development center — its largest outside its home country — in Hefei, a low-key central China city of 10 million people.

It’s a sea change from how foreign automakers operated in China for decades by making cars they developed overseas, sharing their technology with local partners. That strategy has been shoved aside by fast-rising local competitors who have sharply cut into the sales of foreign brands.

“This business model is now gone,” Thomas Ulbrich, the chief technology officer of the Volkswagen Group in China said.

The Chinese Consumer Is King
In what Ulbrich calls a paradigm shift, Volkswagen started the latest overhaul of its approach to China in 2022.

It is developing vehicles specifically tailored to Chinese drivers — cars that will likely never be seen on European roads, though they may make their way to markets in the Middle East and Southeast Asia.

As the new models roll out, Volkswagen will find out if the investment will pay off by helping it to catch up with the likes of Chinese makers BYD and Geely and win back market share.

Such a strategy is key to regaining competitiveness within China, said Rella Suskin, an equity analyst at Morningstar covering the European automotive sector.

But, she predicted, “it will enable them to maintain market share levels in line with current levels, rather than allow them to regain the market share that has been lost over the last few years."

The question is whether it can make money in a hypercompetitive market that has driven prices down to bankrupting levels.

Audi, part of the Volkswagen Group, led the way with this year's introduction of a new brand dubbed “AUDI” — its name in capital letters. VW is gearing up to launch new 2026 models developed “in China, for China,” as the carmaker likes to say.

“It’s a million-dollar question whether this strategy will pay off,” said Claire Yuan, director of corporate ratings for China autos at S&P Global Ratings. “We have to monitor, but I think they are on the right track of catching up in the race.”

China Speed Leaves Competitors in the Dust
Foreign automakers fell behind because of dramatic changes in the Chinese market over the past five years.

Electric vehicles have shot up to about half of new car sales. And buyers expect them to come with the latest digital features, from big iPad-like touch screens to autonomous driving capabilities such as effortless backing into a parking space.

Volkswagens were no longer the right fit in a major market that accounts for about one-third of its global sales, 40 years after it began making sedans in Shanghai with its state-owned local partner, SAIC. For years, basic VW Santana and Jetta sedans were a mainstay of taxi fleets, and the first cars purchased by many city dwellers.

Now, it needs to revamp it's line-up at what has become known as “China speed.” In a market as competitive as China’s, survival depends on pushing out new models and features quickly, said Bill Russo, the CEO of Automobility, a Shanghai-based consultancy.

Chinese EV makers bring new cars to market in 12 to 18 months, versus three to five years for global automakers. “The pace is not a choice but a necessity — and that pressure fuels global competitiveness,” Russo said.

China Emerges as a Source of Innovation
In the mid-1990s, Ulbrich worked in northeastern China, where VW made sedans with another state company, FAW, or First Auto Works, importing everything from seats to wheel rims. The parts weren't available locally.

Thirty years later, nearly everything is made in China. And now it's being designed here. To speed up product development, Volkswagen headquarters has given decision-making power to the local operation.

Other foreign automakers have reacted in different ways. Some have reduced their operations or even pulled out. Japan’s Toyota, like Volkswagen, has transferred authority to its China team to accelerate decision-making, giving them "unprecedented autonomy in product planning and development,” Yuan said.

Volkswagen is looking to pick up know-how from China's EV startups. It has teamed up with electric vehicle maker Xpeng to bring new models to market more quickly and develop its own electronic architecture — essentially the internal computer system that runs all a car's functions.

The approach reflects a growing recognition among foreign automakers that they can learn from China, and not just vice versa. For many, the key is how quickly Chinese firms can turn an idea into a product, slashing development costs and delivering what customers want in a timely way.

“Knowledge flows are a two-way street between China and Germany,” said Martin Hofmann, a Volkswagen executive who is the chair of the German Chamber of Commerce in North China.

In a recent survey of the chamber’s membership, about half of the more than 600 responding companies said they expect Chinese competitors to become innovation leaders in the next five years — and 9% said they already are.