Volkswagen invests $700 million in Chinese EV maker Xpeng to boost sluggish sales

By Laura He

Hong Kong (CNN) — Volkswagen has bought nearly 5% of Chinese electric vehicle maker Xpeng for $700 million and agreed a strategic partnership to develop two new models as it attempts to reverse a decline in sales in the world’s biggest car market.

Subject to final agreement, the companies will join forces to develop two mid-sized VW-branded EVs for the Chinese market, to be rolled out in 2026, Volkswagen said in a statement.

The German group’s Audi subsidiary will also work more closely with its existing partner, SAIC Motor, China’s biggest car maker. Shares in Xpeng jumped more than 30% Thursday in Hong Kong, leading a broad rally in Chinese EV stocks.

China is the single largest market for Volkswagen, accounting for about 40% of its global sales and half of its profits. But the company faces sluggish sales and fierce competition from local rivals, such as BYD, and Tesla, global market leader in fully electric vehicles.

“Volkswagen Group is stepping up the pace of its transformation in China, where the group aims to remain … amongst the top three in the market,” the company said in an earnings statement Thursday.

The company reported a 14.5% drop in its deliveries in China in the first quarter. It saw a recovery in April and May but deliveries in the first half overall were still 1.2% down on the same period in 2022.

‘Complementary strengths’

On Wednesday, Volkswagen said its partnerships with local car makers aimed to swiftly expand the company’s product range with further models for China.

“We are now accelerating the expansion of our local electric portfolio and at the same time preparing for the next innovation step,” said Ralf Brandstätter, Volkswagen’s board member for China.

“With Xpeng, we now have another strong partner that is one of the leading manufacturers in China in key technology areas.”

Xpeng, the Chinese EV maker established in 2015, said Wednesday that the partnership was based on “complementary strengths.”

“We will share smart EV technologies and world-class design and engineering capability with each other and learn from each other,” said Xiaopeng He, chairman and CEO of Xpeng.

Geopolitical tensions between China and the West are complicating life for companies like Volkswagen that rely on China. Volkswagen has faced criticism over its factory in Xinjiang, a region where human rights groups have documented the use of forced labor. China denies any abuses, and Volkswagen said earlier this year that it saw no sign of forced labor during a recent visit to the plant.

The tensions are prompting companies and governments to consider supply chains and trade policies. Earlier this month, Germany announced it would reduce its dependence on China in “critical sectors” including medicine, lithium batteries used in electric cars and elements essential to chipmaking.

Shrinking market share

Volkswagen entered China in 1984 and is one of the most successful foreign car makers in the country. It was the top-selling brand in 2019, controlling 20% of the market. But the company has been losing out to local competitors, with its market share in China falling to 15% last year.

In the first quarter of 2023, BYD, the Chinese EV maker backed by Warren Buffett, surpassed Volkswagen to become the largest brand by sales in China, according to official car insurance registration data.

Volkswagen lowered its forecast for its global car deliveries for the year to between 9 million and 9.5 million, after the first-half decline in China.

Overall, Volkswagen’s sales of EVs rose by 50%, compared with the first half of 2022, and by as much as 68% in Europe, where the group is the market leader.

The German car maker said it would strengthen its strategic position in China, including beefing up its capacity for e-mobility, digitalization and autonomous driving.

Volkswagen is currently expanding its Hefei plant in the eastern Chinese province of Anhui into a “state-of-the-art production, development and innovation hub,” the company said. Production at the new plant will commence this year.

It’s also building a manufacturing facility for high-voltage battery systems in Hefei city. Furthermore, it’s setting up a development and procurement center for fully connected, intelligent EVs in Hefei.

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