In China, for China — And Then?

I. The Numbers

In 2021, Volkswagen was still the largest automaker in China with a market share of 14.4 percent. By the first quarter of 2025, that figure had fallen to 12.1 percent. BYD had overtaken VW at 16.2 percent. BMW dropped from 3.8 to 3.0 percent, Mercedes from 3.9 to 2.7. In that same quarter, VW lost seven percent in sales, Porsche 42 percent, Mercedes ten, BMW seventeen.

At the same time, China remains by far the world's largest automotive market at around 31 million vehicles sold per year — nearly three times the size of the United States, nearly three times the size of the EU. Volkswagen generates roughly 40 percent of its global revenue there, BMW 29, Mercedes 33 percent.

The numbers tell two stories simultaneously: one is about decline. The other is about why you cannot abandon this market.

II. The Answer

The German manufacturers' answer to this situation can be summarized in three words: "In China, for China." That's Volkswagen's phrase. BMW calls it "local for local." Mercedes is developing a dedicated platform exclusively for the Chinese market starting in 2028.

What this means in practice: Volkswagen has built a development center in Hefei for approximately €2.5 billion. 100,000 square meters, over 100 laboratories. For the first time in its history, VW can fully develop a vehicle outside Germany and bring it to production readiness. BMW has tripled its R&D capacity in China within three years. More than 3,200 engineers, designers, and software specialists work there — it is the company's largest development unit outside Germany. 92 percent of leadership positions in the Chinese joint venture are held by Chinese employees.

These are not adaptation offices supporting Wolfsburg or Munich. They are full-fledged development centers that independently conceive, develop, test, and validate vehicles.

III. The Logic

The business logic is difficult to dismiss. An engineer in China costs one-third of what an engineer costs in Germany. VW claims it can reduce development costs by up to 50 percent for certain projects. Development time shrinks by 30 percent.

But it's not just about cost. The Chinese market demands products that don't exist in Europe. Chinese customers expect different infotainment systems, different AI assistants, a different relationship between car and smartphone. Starting in late 2025, BMW is integrating the Chinese AI model DeepSeek into its New Class — but only in China. The market defines the product, and this product cannot be defined from 8,000 kilometers away.

Then there is the question of speed. Chinese OEMs develop a new model in 18 to 24 months. European manufacturers take 48 months. Anyone who needs five years to develop a car, the reasoning goes, is bringing an outdated product to a market that reinvents itself every six months.

For the corporations, the relocation of development is therefore not capitulation but a survival strategy. The alternative — withdrawing from the world's most important market — is not one.

IV. The Circle

A manager at a German automaker recently told of a particular assignment. After Auto Shanghai 2023, he was asked to develop a future-proof operating system. His wish list contained exactly the features that Chinese cars already had. His comment: "We've come full circle." The Chinese used to copy from the Germans. Now it's the other way around.

In the partnership between VW and Chinese manufacturer Xpeng, German engineers today receive a clear instruction: Don't explain how things should be done "properly." Watch. Learn.

In the 1980s, European automakers pushed into China. The deal: market access in exchange for technology transfer. The transfer went from West to East. Forty years later, the direction has reversed — only this time, no one is paying for the transfer. German companies are bringing their knowledge to China themselves, making it available to Chinese teams, and hoping that enough of it flows back to Germany to justify the domestic sites.

V. The Pattern

The relocation of development is not the beginning of a story but its continuation. First, manufacturing was relocated. Then supply chains. Then design. Now development.

Each step followed its own logic. Manufacturing was relocated because labor costs were lower. Supply chains followed because proximity to manufacturing was more efficient. Design was relocated because local markets demanded local understanding. And now development is being relocated because the market dictates the pace and the talent is on-site.

Each step was individually rational. The question is whether the sum of rational individual decisions produces a rational overall outcome.

VI. The Calculation

Proponents say: The relocation makes companies more competitive. Insights from China flow back to Germany. China is the "training camp for global competitiveness," as one industry observer put it. Those who survive there will survive anywhere.

Skeptics ask: What remains when manufacturing, design, and development all take place somewhere else? What exactly is a German automaker's core competency at that point? The name? The brand? The logo?

In 2024, Germany recorded its first-ever trade deficit in capital goods — the category encompassing machine tools and industrial equipment that was long regarded as the symbolic core of German industrial strength. In the same year, German companies invested €5.7 billion in China — three-quarters of it from the automotive industry. The corporations' balance sheets may look better in the short term as a result. Whether the balance sheet of Germany as a location benefits is a different question.

VII. The Silence

There is one thing that is rarely discussed in boardrooms and at press conferences: irreversibility. Know-how, once transferred, does not come back. Engineers who are laid off in Wolfsburg or Sindelfingen because their work is now done in Shanghai or Hefei will not be standing by five years later if the strategy changes. Competencies that were built over decades cannot be rebuilt in decades — because the ecosystem in which they arose will have disappeared in the meantime.

The automotive industry eliminated over 55,000 jobs in Germany in 2025 alone. VW plans to cut 35,000 positions in Germany by 2030. Audi is eliminating 7,500 positions, primarily in development and administration. The suppliers — ZF, Bosch, Continental — follow with tens of thousands more. Meanwhile, the development centers in China are growing.

One can view this as a necessary adjustment. One can also view it as a decision being made with the quiet inevitability of a one-way street.

VIII. The Question

There is an argument that is seldom stated openly but is implicit in the logic of the relocation: if the technological lead is shrinking anyway, then it is economically rational to deploy what remains where it still yields the greatest return — namely in the Chinese market, in collaboration with Chinese partners, using Chinese infrastructure. It is the logic of a merchant selling off remaining stock before it becomes worthless.

Whether this logic is correct depends on which question you ask. If the question is, "How do we maximize shareholder value over the next five years?", the answer is probably yes. If the question is, "Will Germany still be developing cars in twenty years?", the answer is less clear.

Oliver Zipse, BMW's CEO, says the insights gained in China will secure the company's future competitiveness on the world market. VW CEO Oliver Blume speaks of becoming faster and more efficient. Both may be right. Both are speaking about the future of their companies. Whether they are also speaking about the future of Germany as an industrial location remains an open question.

For there is a difference between a company that survives and an industry that survives. A company can keep its headquarters in Germany, serve its shareholders in Frankfurt, and hold its board meetings in Munich — while its value creation takes place elsewhere. It would then no longer be a German automotive company but a German company that manufactures automobiles in China. The distinction sounds academic. For the people who live in Wolfsburg, Stuttgart, and Munich, it is not.

In April 2025, at Auto Shanghai, BMW CEO Zipse promised that the models for China were "more Chinese than ever before." He meant it as a mark of quality. Perhaps it was also a description of the current state of affairs.