Ryan Xu was an ideal customer for German automakers. The Guangdong entrepreneur and her husband own a Porsche 911 and a Mercedes-Benz G-Class and were among the first to purchase the electric Porsche Taycan.
However, his view of German cars changed. This is because Chinese consumers increasingly value technological sophistication over traditional attributes such as power and drivability. The software systems in the Taycan, which costs well over $100,000, were “terrible,” said the 36-year-old mother of three. According to her, the model was “just an electrified Porsche – and that’s it.”
This discontent is not isolated. As China moves away from combustion cars, Volkswagen, Mercedes-Benz Group and BMW are struggling to offer electric vehicles that attract customers in their biggest and most lucrative market, risking investments worth €35 billion ($38 billion).
After problems with braking and other quality issues, the Xu family sold their Taycan and purchased an ET5 from the Chinese brand Nio. The car cost about a third less than a Mercedes EQE, a model Xu also considered, but the Chinese model offered a more luxurious interior design, smooth voice controls and a personalized welcome for children when they entered the vehicle.
“German cars can barely compete with this level of technology,” said Xu, who runs a business with her husband. Mercedes, BMW and Audi “can no longer be seen as luxury cars”.
The latest warning signs emerged last week when the three German manufacturers reported third-quarter sales declines in China. BMW had its biggest sales drop in more than four years, with a 30% decline, and Mercedes deliveries fell 13% due to low demand for its more expensive models such as the S-Class and Maybach limousines.
Porsche’s sales in China fell 19%, recording its worst third-quarter performance in a decade, with global demand for the Taycan cut by almost half. Volkswagen – parent company of Porsche and Audi – reported a 15% drop. “Competition in China is especially intense,” said Marco Schubert, VW sales director.
After dominating the era of combustion cars, German manufacturers became complacent, underestimating the threats from new competitors and reluctant to abandon the profits generated by big engines. This allowed Tesla and local manufacturers, led by BYD, to come forward with affordable, technology-driven plug-ins, making the German presence dispensable in the Chinese market.
“The turning point is happening now for these automakers,” said Stephen Dyer, director of Shanghai-based consultancy AlixPartners. “They need to drastically change their market strategies.”
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The next phase of this challenge can already be seen at the Paris Motor Show, where Chinese manufacturers are looking to gain share in the European market. Companies like BYD and Xpeng will showcase their latest technologies at this year’s biggest European automotive event.
At least one recent initiative did not go as planned. During a Volkswagen presentation about its future electric vehicles, the microphone and projector failed, leaving sales and marketing chief Martin Sander visibly frustrated.
BMW CEO Oliver Zipse, on the other hand, criticized Europe’s plan to ban the sale of combustion cars from 2035, claiming it will cause a “huge shrinkage” of the automotive industry in the region.
Although German manufacturers still control around 15% of the Chinese market, this share was already 25% before the pandemic. Even worse, its presence in the electric vehicle market is less than 10%. Without a quick turnaround, the situation could worsen and pit Germany’s “Big Three” in an existential battle. At the moment, VW, Mercedes and BMW only have half the market value of BYD.
More than other international competitors, German automakers have invested all their money in China. While some rivals have cut their losses, the German companies are redoubling their efforts to regain market share. But the battle appears uphill, especially with Beijing’s support for strengthening local manufacturers.
Volkswagen intends to take a long-term approach. The company intends to continue its “in China, for China” strategy to protect its long-term prospects. BMW and Mercedes are also betting on a localization approach to attract Chinese consumers.
The importance of this bet is evident. With the European automotive market near its peak and the US saturated, there is no viable alternative to China to achieve similar volumes and profits.
This dependence raises concerns, given the vast presence of German automakers in China. Together, they operate more than 40 factories in the country, an investment too large to abandon easily, which explains the opposition to the European Union’s plans to impose tariffs on Chinese electric cars.
Withdrawing from China – as smaller Japanese brands Suzuki Motor and Mitsubishi Motors have done – is almost unthinkable. Furthermore, any restructuring is complicated by complex relationships with local government entities. This puts the focus on developing features that Chinese consumers want.
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The urgency increased in 2022 after Volkswagen China boss Ralf Brandstätter warned the supervisory board about the advance of Chinese manufacturers. Volkswagen then chartered flights to send hundreds of employees to the Shanghai Auto Show in April 2023 to see the situation up close.
Since then, there has been an intense competitive response. A few weeks after the show, VW CEO Oliver Blume replaced the head of the Cariad software unit in an effort to accelerate technological improvements. VW has also invested in Chinese startup Xpeng to build cars using the company’s expertise in EVs.
In response to a profit warning in September, one of Mercedes CEO Ola Källenius’ first moves was to visit China to check on progress on its restructuring, including partnering with CATL for batteries and Tencent for digital services. BMW has joined forces with Great Wall Motor Co. to build EVs for the Mini brand.
However, the cumulative result is that German cars will become progressively less German in their largest market. This expansion goes against the German government’s efforts to reduce dependence on China, according to Gregor Sebastian, an analyst at Rhodium Group.
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Maintaining a foothold in China is a “huge risk,” he said, noting that the German state may need to intervene if things go wrong. “They expect to be too big to fail.”
After years of popularity, the market has changed and regaining the enthusiasm of a younger, technology-oriented clientele is a big challenge. With the transition to electric, local brands have shown that they can compete with VW, BMW and Mercedes in quality and surpass them in price and technology.
The impact can be seen at the Mercedes factory in Sindelfingen, near Stuttgart. Demand fell and production of the S-Class was reduced to a single shift for the first time.
While cost cuts begin to affect the German automotive industry, Chinese operations are still preserved. This shows that executives maintain hopes of recovery. However, large-scale operations in China are difficult to scale back, as job cuts need to be discussed with local partners and approved by authorities who have little incentive for cooperation.
So the pressure is on German carmakers to revive their sales, even though the playing field now favors local manufacturers.
