In 1984, Volkswagen partnered with a Chinese automaker due to legal requirements. Today, the German company is collaborating with Chinese firms because it wants to leverage their technological prowess. Volkswagen Group still maintains its original joint ventures but now relies on companies like Xpeng for hardware and software, exemplifying the shifting balance of power in the automotive industry.
The Rise of Software-Defined Vehicles
Chinese consumers have a unique preference for what are often referred to as “software-defined vehicles.” These connected cars enable drivers to perform various tasks through voice commands or in-car interfaces, mirroring their digital lives. However, Volkswagen’s struggles to build an in-house software division have been well-documented, leading the company to seek collaborations.
A Partnership Born from Necessity
In 2025, Volkswagen Group’s China profits fell by approximately 45%, prompting the company to acknowledge intense competition from Chinese firms. Xpeng, a major partner in China, helped VW build a hardware and firmware architecture called CEA for the German automaker’s vehicles in the country.
A Glimpse into the Future
In February, news broke that VW Group would be the first customer for Xpeng’s VLA 2.0 automated driver assistance system, which is expected to equal or surpass anything made by any other global automaker. The ID.UNYX 08, a co-developed vehicle, rolled off the assembly line in March, showcasing China’s speed and efficiency.
Rivian: A Rival Born from Necessity
Rivian and VW are collaborating on various projects, including hardware and software development. This partnership has given Rivian a roughly $6 billion lifeline at a time when the EV maker is ramping up production of its mid-priced, higher-volume R2 SUV.
A New Era in Automotive Partnerships
Trade disputes and political tensions are driving carmakers to form different partnerships. For instance, the U.S. has banned certain types of Chinese software and hardware for connected vehicles. The longer-term picture remains unclear, but Xpeng aims to compete globally through partnerships like its collaboration with VW.
The Road Ahead
While companies like Tesla, Rivian, and Lucid Motors are leading the charge in building connected vehicles outside of China, Chinese firms may outpace Western ones in their home market. If this proves true, Volkswagen may face a tough choice down the road.
- Volkswagen’s China profits fell by approximately 45% in 2025.
- Xpeng helped VW build a hardware and firmware architecture called CEA for its vehicles in China.
- Rivian received a roughly $6 billion lifeline from its partnership with VW.
- The ID.UNYX 08, a co-developed vehicle, rolled off the assembly line in March, showcasing China’s speed and efficiency.