Volkswagen's "Slimming Down"

For a long time, there was a consensus in the automotive industry: the center of the global auto industry was in Germany, and Volkswagen AG was the most important symbol of this center.

At its peak, Volkswagen sold more than 10 million cars a year. It owned more than ten brands, including Volkswagen, Audi, Porsche, Skoda, Bentley, and Lamborghini, with factories around the world forming a vast manufacturing network.

But now, the situation for this German giant has changed.

Recent reports indicate that Volkswagen AG is planning to reduce its group's global production capacity from approximately 10 million units to 9 million units, a cut of nearly 10%.

Volkswagen CEO Oliver Blume does not intend to keep struggling. His approach to solving the capacity problem is to consider allowing Chinese companies to enter his factories to absorb the surplus capacity.

A month ago, the Financial Times pointed out that XPeng was in negotiations with Volkswagen to purchase a complete vehicle factory in Germany.

Previously, Volkswagen extended an olive branch to XPeng, and the two parties jointly developed battery electric vehicles for the Chinese market. On the other hand, after XPeng's sales gained momentum in Europe, it currently contracts Magna Steyr's factory in Austria for contract manufacturing, showing a clear hunger to expand local production capacity in Europe.

The supply and demand from both sides fit together perfectly.

Looking back, twenty years ago, the biggest dream of Chinese automakers was to enter Volkswagen's supply chain; ten years ago, Chinese automakers hoped to learn how to build cars from Volkswagen; and today, Chinese automakers are beginning to have the opportunity to take over Volkswagen's factories.

This role reversal is itself a microcosm of the changing landscape of the global automotive industry.

Volkswagen's problems first appeared in China.

The Chinese market was once Volkswagen's most important source of profit. Around 2019, Volkswagen AG's annual sales in China exceeded 4.2 million units, accounting for nearly 40% of its global sales. At that time, Chinese consumers regarded Volkswagen as synonymous with quality and reliability when buying cars. Volkswagen leveraged its scale advantages to replicate its mature global technology system in the Chinese market, thereby achieving profit returns far higher than those in the European market.

However, the new energy era has changed the rules of the game. When a Chinese new force can complete a product iteration within two to three years, Volkswagen's traditional development process often requires a longer cycle.

To catch up with changes in the Chinese market, Volkswagen began to actively learn from Chinese companies. Now, this cooperation seems to be extending further into the manufacturing sector. In the view of industry insiders, if some of Volkswagen's European factories can produce Chinese brand cars in the future, or if they are taken over and operated by Chinese automakers, a new model of industrial division of labor will emerge in the global automotive manufacturing system previously dominated by German carmakers.

For Volkswagen, this is actually a pragmatic choice. Because the most expensive assets in the automotive industry are not technology, but factories. A modern automobile factory often requires an investment of billions of euros. As long as the factory utilization rate declines, fixed costs will quickly erode profits.

Data shows that Volkswagen's operating margin for the 2025 fiscal year was only 2.8%. According to the company's published targets, after the restructuring is completed, it hopes to restore the operating margin to 4% to 5.5% in the 2026 fiscal year, and strive to reach a level of 8% to 10% in the long term.

To achieve this goal, relying solely on selling more cars is no longer realistic.

Blume stated that in an environment "lacking growth prospects," the group must adjust its capacity to the 9 million unit level to match real market demand.

Behind this statement lies the common problem that the entire European automotive industry is facing.

On one hand, uncertainty in the US market is increasing. In recent years, the United States has continuously adjusted its trade policies, raising the cost of some imported cars and parts. For Volkswagen, which relies on a global supply chain, profitability in the North American market has been affected.

On the other hand, local demand growth in Europe is limited. The Chinese market has transformed from the global engine of automotive growth into the most fiercely competitive battlefield. In the past decade, Volkswagen was able to earn excess profits by relying on the Chinese market; in the next decade, it will need to face challenges from Chinese brands on a global scale.

From this perspective, Volkswagen's reduction of 1 million units in capacity means that it no longer prioritizes "getting bigger," but instead puts "living more efficiently" first.

In fact, this change is not happening only at Volkswagen. In the past few years, traditional automotive giants such as Ford, General Motors, and Stellantis have been closing factories, cutting models, and compressing costs. The global automotive industry is shifting from pursuing scale expansion to pursuing capital efficiency.

The special thing about Volkswagen is that it happens to stand at the intersection of the old and new eras.

In the coming years, whether Volkswagen will really sell some of its factories, and whether XPeng will become the first Chinese new force to take over the capacity of a traditional European automaker, still remains uncertain.

But one point is becoming increasingly clear. As the global automotive market enters a stage of stock competition, what truly determines success is no longer who owns more factories, but who can manufacture products that consumers are willing to buy at lower costs, faster speeds, and higher efficiency.

In this sense, whether Volkswagen factories produce Volkswagen cars or Chinese cars in the future may no longer be so important.

More importantly, the center of gravity of the global automotive industry is slowly shifting from the banks of the Rhine to the Yangtze River basin. And Volkswagen's proactive contraction of capacity is, to some extent, a profile of this change.

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