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Volkswagen's China Problem
Volkswagen's China Problem
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0:00
China in 1983 was the version of China
0:03
that made its transformation into what
0:04
it is today so very remarkable that's to
0:08
say it was poor and it was
0:10
underdeveloped its GDP per capita was
0:12
$32 making for a ranking of 161st in the
0:17
world below the Central African Republic
0:19
Uganda and the koros this made the
0:22
country rather unattractive as an
0:24
expansion market for Multinational
0:25
Enterprises the population was massive
0:28
sure but it didn't have a whole lot more
0:30
going for it from the perspective of
0:31
corporate Executives and ultimately even
0:34
if companies wanted to enter the Chinese
0:36
market for the longest time they just
0:38
simply couldn't it was one of the most
0:40
closed off economies in the world it was
0:42
a centrally planned socialist economy
0:45
incompatible with the capitalist ones
0:47
from the west and there were barely even
0:49
diplomatic relations with Europe and
0:51
America let alone economic ones so it's
0:54
no surprise that before the 1980s no
0:57
Western auto manufacturer had entered
0:59
the Chinese Market change started after
1:02
Deng sha ping took power he kicked off
1:04
the process of economic reform leading
1:06
to the process of opening up leading to
1:08
the Chinese government inviting a few
1:09
Western auto manufacturers to form joint
1:12
ventures with Chinese car companies
1:13
leading to the first Chinese made
1:15
Volkswagen rolling off the line in
1:17
Shanghai in
1:19
1983 this was fortuitous VW had been
1:23
coaxed into forming a joint venture with
1:25
the Shanghai automotive industry
1:26
Corporation and it happened at the
1:28
absolute perfect moment these same
1:32
economic reforms that made it possible
1:33
for VW to enter the market kicked off
1:36
the transformation into the middle
1:37
income Behemoth China is today and as
1:40
disposable incomes grew and the Chinese
1:42
middle class expanded so too did the
1:45
country's Car Sales since then more so
1:48
than any Western Auto Company VW has
1:51
thrived on China sales in fact by the
1:54
early 2000s the country accounted for
1:57
half of their Global profit it was the
2:00
group's single largest market
2:02
manufacturing costs were cheap sales
2:04
were numerous and profit margins were
2:07
enormous at least until recently for
2:11
decades total sales in China were Rising
2:14
while the group's market share largely
2:15
held steady in 2019 sales hit nearly 4
2:19
million units but then the bottom fell
2:21
out Co can explain these years sure but
2:25
not these ones as VW has struggled to
2:27
hit 3 million unit sales and in the
2:29
first three quarters of 2024 only
2:31
mustered 2 million across the 39 VW
2:35
group factories in China earnings are
2:37
down about 50% from the high set in 2015
2:40
while it's looking even worse for
2:42
certain brands within the group scoda a
2:45
Czech automaker owned by VW since 1991
2:48
has watched its sales absolutely tank
2:50
across the 2020s a disaster for a brand
2:53
that's tailored designs and even entire
2:55
models specifically to appeal to the
2:58
Chinese consumer but what makes makes
3:00
this a true crisis for the world's
3:01
largest auto company is that things are
3:04
bad Beyond China too this Factory in
3:06
Brussels Belgium has been building
3:08
Volkswagen since the 1950s and Audi's
3:10
since 2006 but now on account of
3:13
slumping Audi Q8 rron sales VW has
3:16
announced the factory will close its
3:17
doors at the end of February 2025
3:21
without a viable buyer for the factory
3:23
thousands of jobs are set to vanish
3:25
entirely it likely won't be the last
3:27
plant to close either as Volkswagen
3:29
announced that it would also potentially
3:31
close three additional factories within
3:33
Germany in an attempt at massive
3:35
overhaul something the company has
3:37
simply never done in its Home Country
3:40
all this the massive slump in sales the
3:42
unprecedented response to right size and
3:44
stabilize and the developing domestic
3:47
distrust coming from it has seen the
3:49
group's sea Suite shuffled German
3:51
Factory workers on strike and pundits
3:53
declaring this as potentially the
3:54
beginning of the end of Volkswagen's
3:56
Global dominance but perhaps most
3:59
concerningly there's a reason to believe
4:01
that China is just the canary in the
4:03
coal mine the graph speaks for itself
4:07
here's vw's market share in China it's
4:09
in freef fall and here's the market
4:11
share of byd China's newly minted
4:14
Automotive
4:16
bth back in 2020 its market share sat at
4:20
1.8% today it's at 11% making it not
4:24
only the new largest Auto Company in
4:26
China but also the world's largest ev
4:29
manufacturer usurping even Tesla byd's
4:34
explosive growth was spurred like many
4:35
things in China by a combination of
4:37
central planning and free market
4:39
economics around 2020 Chinese
4:42
governments of all levels National
4:44
provincial and local started rolling out
4:46
a deluge of incentives for EVS and
4:48
plug-in hybrids in Shanghai for example
4:51
the municipal government requires car
4:53
buyers to first purchase a license plate
4:55
as a method of restricting the number of
4:57
cars hitting the road these are sold via
4:59
a monthly auction where demand always
5:02
far outstrips Supply only about 5 or 6%
5:05
of biders typically hit a plate pushing
5:07
prices up to between 12 and
5:10
$14,000 but for a number of years EV
5:13
buyers could get a license plate for
5:14
free an absolutely massive incentive
5:17
considering some Chinese EVS now cost
5:20
less than a license plate in Shanghai
5:22
there's also been a Litany of buyer
5:24
rebates sales tax exemptions
5:25
infrastructure funding direct support of
5:27
automakers and more that's total to an
5:30
estimated $230 billion in funding for
5:33
EVS by the Chinese government between
5:35
2009 and 2023 where as elsewhere EV
5:38
incentives were merely focused on making
5:40
them price competitive with internal
5:41
combustion cars in China they were often
5:44
significantly cheaper so it's no
5:46
surprise their sales exploded but of
5:49
course that just explains why China
5:51
transitioned to EV so quickly not why
5:54
byd usurped VW the explanation for that
5:57
is that well ID's cars were just simply
6:01
better in recent years vw's entry level
6:04
EV in the Chinese market was its ID3
6:07
which it was selling for about
6:09
$23,000 this model boasts a 0 to 50 km
6:12
perh time of 3 seconds and a certified
6:14
range of $450 km in the US or Europe
6:18
This would seem like a steal relative to
6:20
other EVS but in China for half that
6:23
price about $11,800 a buyer could
6:26
instead get the upper trim of the entry
6:28
level B by deev the seagull this has a
6:32
slower 4.9 second 0 to 50 km time and a
6:35
shorter 405 km range but it's not too
6:38
far off and there are plenty of other by
6:41
EVS selling for well below the ID 3's
6:43
price yet boasting better specs the byd
6:47
dolphin KN version has 520 km of range
6:50
yet sells for under $118,000 for example
6:54
and the Volkswagen group isn't doing
6:55
much better on the other end of the
6:56
spectrum either the group's two primary
6:59
luxury Brands Audi and Porsche are each
7:01
struggling as well Audi sold fewer than
7:04
15,000 EVS to China in the first 9
7:07
months of 2024 and Porsche sales are in
7:10
such freef fall that the company is
7:11
closing a third of their dealerships in
7:14
the country there is a market for
7:16
higher-end Western EVS in China but that
7:18
market has been absolutely dominated by
7:21
Tesla the company convinced the
7:22
government to allow them to build their
7:24
own dedicated Factory in China the first
7:27
time ever a foreign auto company has
7:28
been allowed to to enter the Chinese
7:30
market outright not as part of a joint
7:32
venture with a Chinese firm now Western
7:35
Brands typically are able to command a
7:37
price premium in China they're often
7:39
viewed as luxury goods VW doesn't
7:42
necessarily need to beat its Chinese
7:44
competitors on price for equivalently
7:46
speced cars as historically consumers
7:48
have perceived the Western Brands as
7:50
just simply better until recently that
7:53
is even if the ID3 or other vws might
7:57
match or beat byd equivalent on range or
8:00
acceleration or charging time the
8:02
day-to-day experience of owning a VW EV
8:05
is reportedly just worse they lose in
8:09
the details and nowhere is that more
8:11
true than with
8:13
software now up until the 2010s really
8:16
car manufacturing was largely an
8:18
exercise in industrial expertise with
8:21
companies like Toyota Volkswagen and
8:23
General Motors vying for the world
8:24
number one spot in total sales on
8:26
account of their ability to produce
8:27
durable Dependable fix ible Hardware
8:31
then came Tesla Apple carplay Ling
8:33
assist heads up displays and a myriad of
8:35
other features running from safety to
8:37
incar entertainment that required cars
8:39
capable of computing suddenly a software
8:43
Revolution for legacy car makers such
8:46
rapid change was jarring But ultimately
8:48
was such that they could at least keep
8:49
up with through Outsourcing to smaller
8:51
more Nimble software companies making
8:54
Revolution more manageable too was the
8:56
fact that internal combustion engine
8:58
cars simply don't requ require the same
9:00
level of software sophistication as an
9:02
electric vehicle a touchscreen
9:04
infotainment system doesn't necessarily
9:06
need to interact with or be aware of a
9:08
lane assist or automatic braking safety
9:10
feature for instance so to keep up
9:13
Volkswagen at first went the route of
9:15
other Legacy car makers contract out the
9:17
software focus on their core competency
9:19
the hardware but that changed in 2015
9:22
with dieselgate the Scandal involving an
9:25
emissions control system designed to
9:26
fraudulently manipulate the results of
9:28
emissions test S as part of the ensuing
9:30
legal settlement the company invested $2
9:33
billion into building out the Electrify
9:35
America brand of EV fast Chargers in
9:37
North America and then $40 billion into
9:40
their EV program and as for the software
9:42
that ran those EVs and their entire
9:44
fleet of vehicles for that matter well
9:46
VW was going to do that too in 2019 the
9:49
company announced that they no longer
9:51
look for software suppliers but they'd
9:53
be one no longer would they mirror the
9:56
strategy of other Legacy automakers they
9:59
take the Tesla route they'd be a car
10:01
company and a tech company the vision
10:04
was straightforward enough they'd
10:06
radically simplify and there would no
10:08
longer be any black boxes that the
10:09
company itself couldn't understand under
10:11
their hoods each of their cars
10:14
leadership noted were using some 70
10:16
separate computers and across VW groups
10:18
Brands there were eight separate
10:20
software architectures now the company
10:23
wanted to cut those numbers to three
10:25
computers per car and one operating
10:27
system across the entire group group
10:30
while the concept was simple the
10:31
undertaking was massive as VW group
10:34
didn't even have a built out software
10:36
Branch so they started from the ground
10:38
floor founding a software and technology
10:40
company now called carad here outside of
10:43
Munich and an Audi plant with a host of
10:45
additional offices extending as far as
10:47
Seattle to house its 3,000 new employees
10:50
now no Volkswagen brand would have to
10:52
rely on outside software they'd have one
10:55
in-house operating system serving their
10:56
purposes alone just as soon as they
10:58
built it this was a first a legacy car
11:02
manufacturer so boldly embracing
11:04
software GM hadn't made such a move
11:06
neither had Ford nor Toyota nor had
11:08
Honda or Hyundai neither had even Tesla
11:11
who shared the most similar approach to
11:13
software as Tesla from its founding was
11:15
a software developer making software a
11:17
core competency from the beginning but
11:19
the problems were immediate while
11:22
Volkswagen was able to begin delivering
11:23
certain trims of its first modern
11:25
electric vehicle the ID3 in China and
11:28
Europe nearly on time the buyers were
11:30
asked to patiently wait for software
11:32
updates before their infotainment
11:33
systems and heads up displays would be
11:35
fully operational for the company's
11:37
first electric car release in the much
11:39
anticipated ID series it was a massive
11:42
blender as Reddit and YouTube became
11:44
replete with ID3 Rants and painful
11:46
summaries of continued software snafus
11:49
making matters worse in the same year
11:51
software difficulties also delayed the
11:53
release of the popular VW Golf as the
11:56
company simply couldn't ensure Network
11:57
safety in some markets for over theair
12:00
updates while the launch of the electric
12:02
id4 in North America went a bit smoother
12:04
software soon proved the vehicle's
12:06
Achilles heel as about a third of recall
12:09
notices on the vehicle could be
12:10
attributed to software problems
12:12
unfortunately for the VW group kad's
12:14
issues were more structural than simply
12:16
stumbling out of the starting blocks
12:19
issues for the ID group are largely
12:20
attributed to kad's most rudimentary
12:23
product E3 1.1 the platform designed for
12:26
the group's Mass Market EVS but cariad
12:29
is in 2019 was also tasked with the
12:31
concurrent development of two other
12:33
platforms E3 1.2 a step up in complexity
12:36
designed for higher ndvs from the likes
12:38
of Audi and Porsche as well as E3 2.0 a
12:41
software product that would usher in
12:42
autonomous driving for the group in the
12:44
late 202s carad struggled with these
12:47
products too leading to delays on
12:49
Porsche's EV Macon and more recently
12:51
Audi's qh rron once again on account of
12:54
software while Bentley counting on E3
12:57
2.0 to Usher the brand into its EV era
13:00
has already announced that its full
13:02
transition away from internal combustion
13:04
isn't likely until the mid 2030s in part
13:07
because of uncertainty over whether kiad
13:09
can deliver a reliable product from the
13:12
beginning Kad was founded to become a
13:14
central strength of the group so it's
13:16
been Central in both near and long-term
13:18
product road maps and because it has
13:20
failed so spectacularly up until this
13:22
point it's left the entire group from
13:25
Mass Market to luxury in a state of
13:28
uncertainty and Beyond the operational
13:30
implications the end result is still not
13:33
what it needs to be anecdotally the
13:35
reviews indicate that while VW software
13:37
might be improving it's still far behind
13:40
that of byd or Tesla so now the company
13:43
is in damage limitation mode along with
13:46
the factory shutdowns it's aiming to cut
13:48
pay by 10% across the board and has
13:50
already finalized a plan to do so with
13:52
managerial staff largely through a
13:54
reduction in bonuses to avoid further
13:56
Factory closures and pay cuts though the
13:58
company needs to make some bold moves
14:01
it's starting by trying to find the next
14:03
China and VW believes One Prime Emerging
14:06
Market opportunity is here in Brazil
14:09
this is in fact where VW opened its
14:11
first International Factory in the 1950s
14:14
and today boasts four factories but the
14:16
company still believes there's more
14:18
juice to be squeezed it's aiming for 40%
14:20
market growth by 2027 by introducing 15
14:24
new electric and flex fuel models to
14:26
Brazil at the end of the day though VW
14:29
still thinks it can salvage the Chinese
14:31
market all they need to do is follow the
14:33
lead of the new market leaders after
14:36
plenty of public rhetoric on how they
14:37
won't get coaxed into a price war with
14:39
the Chinese manufacturers VW has been
14:41
coaxed into a price war with the Chinese
14:43
manufacturers and dropped prices across
14:45
its lineup to build back market share
14:47
recently it also introduced the ID code
14:50
concept a fully electric vehicle
14:52
equipped for fully autonomous driving
14:54
developed specifically for the Chinese
14:56
market with the kind of techy futuristic
14:58
features that have helped Propel byd
15:00
sales this includes a self-cleaning mode
15:02
where the car uses UV light to purify
15:05
the air and a built-in Robot vacuum
15:06
cleaner to clean surfaces VW also took a
15:10
4.99% ownership stake in Chinese EV
15:13
startup xang by collaborating with an
15:15
established in-market brand Volkswagen
15:17
says it will cut production Time by 30%
15:20
and production costs by 40% on the two
15:22
models it plans to introduce with xang
15:24
in 2026 But ultimately if vws are going
15:28
to be competitive anywhere they're going
15:30
to have to get good at software in July
15:33
Volkswagen announced a joint venture
15:35
with American Eevee darling rivan known
15:37
for breaching the SUV and recreational
15:39
vehicle markets the initial $1 billion
15:42
investment will be followed by another
15:43
$4.8 billion in the next several years
15:46
all dedicated to research and
15:47
development in the integration of rivan
15:49
software into Volkswagen Vehicles set to
15:51
launch by 2027 rivan pioneered what's
15:54
called zonal architecture basically
15:57
splitting up a cars Network to reduce
15:58
wire Ing and hardware and its
16:00
interdependence on other systems and the
16:02
plans are to implement it first into
16:03
Volkswagen's luxury Brands Porsche Audi
16:06
and eventually down Market to VW
16:08
Vehicles themselves the transition
16:10
towards electric vehicles has been a
16:12
difficult moment for the old guard of
16:14
the Auto industry few would have
16:16
predicted that a Silicon Valley startup
16:18
could explode into the world's most
16:19
valuable auto company but then Tesla did
16:23
the incumbent to manufacturers
16:24
eventually took this threat seriously
16:26
recognizing that it's now only a
16:28
question of how long the transition
16:29
towards EV takes not whether it'll
16:32
happen but suddenly byd has become
16:34
effectively the second Tesla the second
16:38
EV manufacturer to achieve explosive
16:40
growth and unlike in the case of Tesla
16:43
and the West as byd Rose so too did a
16:46
Litany of other smaller Chinese EV
16:49
manufacturers it's a far more
16:51
Diversified Market than it was seen in
16:52
the US and Europe during the big growth
16:54
years of Tesla that's to say the
16:57
challenge to the incumbents this this
16:59
time is even stronger perhaps the one
17:02
upside for Volkswagen is that it's
17:04
having to confront this challenge Now
17:07
Chinese EV manufacturers are just
17:09
starting to ramp up exports the cost of
17:12
these EVS is just so much lower than
17:14
competitors that they're sure to quickly
17:16
entrench in markets around the world in
17:18
response the EU set tariffs that cut
17:20
into this cost Advantage alleging that
17:22
the prices are made possible by
17:24
significant government subsidies the US
17:26
under similar logic set a 100% tariff
17:30
making it effectively impossible for
17:32
Chinese auto companies to compete in the
17:34
market but tariffs are not a wall
17:36
they're just a hurdle and with time the
17:38
Chinese companies will find a way
17:41
already by is pivoting its Europe
17:43
strategy to hybrids as these are not
17:46
covered by the tariffs VW one could say
17:49
has the opportunity to figure out how to
17:52
meaningfully compete against Chinese EVS
17:54
in China before they have to do so
17:57
across the globe all all the other auto
17:59
companies without as significant a China
18:01
presence are not facing these same
18:04
challenges so they're not able to put
18:05
their products to the test in the same
18:07
way on the outside Eevees look like cars
18:11
they are of course and in many cases
18:13
their bodies are identical to those of
18:15
gas powered equivalents but what makes
18:17
this industry transition so tumultuous
18:19
is that on the inside the factors that
18:22
influence competency in EV design and
18:24
Manufacturing are so fundamentally
18:27
different than those that went into
18:29
internal combustion cars over A Century
18:32
of institutional knowledge within
18:33
companies like VW is now almost
18:36
worthless perhaps the biggest value they
18:38
retain is just their brand there's every
18:41
reason to believe that successful
18:43
internal combustion vehicle
18:44
manufacturers won't turn into successful
18:46
EV manufacturers the task ahead for VW
18:50
and other incumbent car manufacturers is
18:52
so tremendous that looking back in the
18:55
decades to come the ones that make it
18:57
will perhaps be more remarkable than the
18:59
ones that
19:01
don't China is fascinating I never get
19:04
tired of trying to understand the ways
19:05
in which this NACI superpower is
19:07
increasingly affecting the entire world
19:09
and clearly if you've made it to this
19:11
point in the video you're on the same
19:12
page that's why I'd recommend you watch
19:14
polymatter series China actually it's a
19:17
nebula original that attempts to dive
19:19
deep into how the country actually works
19:21
for example you've heard about Chinese
19:23
censorship or their one child policy or
19:25
their elimination of poverty and you
19:27
probably remember the surface level
19:28
explanation for each of these but do you
19:30
really truly understand each on a
19:33
nitty-gritty level that's what China
19:35
actually is for it's a really
19:37
interesting show and this is just one
19:38
example of nebula exclusive content
19:40
that's worth watching as you probably
19:42
know by now nebula is a streaming
19:43
service started by digital creators
19:45
myself included designed from the ground
19:47
up to be the best home to video content
19:50
quite a lot of thinking has gone into
19:51
what that actually means but it starts
19:53
with the fact that it's completely ad
19:55
and sponsorship free which means the way
19:57
we make money on it is through charg ing
19:59
one low subscription fee I know at first
20:01
this sounds like a downside but I
20:03
believe it's the opposite with this
20:04
subscription fee we're able to not only
20:06
provide stable predictable income to a
20:08
curated selection of top quality
20:09
creators we're also able to fund the
20:11
production of top-notch higher budget
20:13
nebula Originals the idea is that there
20:15
are all these digital creators out there
20:17
that have great ideas about new things
20:19
to make they just need a little more
20:21
money to do so than what YouTube's
20:22
economics can support this has produced
20:25
shows like the getaway a reality game
20:27
show on Wheels produced by the Wendover
20:28
and jet lag team or night of the coconut
20:31
I'll film about an interdimensional
20:32
genocidal coconut by Patrick Williams
20:34
and it really doesn't matter if you
20:35
still have no idea what that means it's
20:37
really good you should really watch it
20:39
or Boomers a brand new Doc by Tom
20:41
Nicholas about how the baby boomer
20:42
generation managed to amass so much
20:44
wealth and power and the consequences of
20:46
this phenomenon these are just a few of
20:49
my favorites but it's worth noting that
20:51
our 2025 nebula original calendar is the
20:53
busiest and highest budget it's ever
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been we're making lots of really cool
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stuff if you want to check nebula out
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you can do so for 40% off when you head
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to our link
