(Bloomberg) — Volkswagen AG must maintain its focus on China to continue being one of the world’s leading automakers — no matter who its chief executive is — according to the person who’s led the company’s operations in the nation since 2019.
Stephan Wollenstein, who first came to the country in 2004 and will step down as China CEO at the end of this month, said he’s witnessed a “fundamental paradigm shift” in the auto industry, which has forced global carmakers including VW to focus on China, now the world’s biggest auto market.
“If you’re not in China and if you don’t cope with China’s speed and treat China specifically, I have my doubts that you will be a leading manufacturer in the next 5-to-10 years,” he said.
VW has a “pretty solid projection” that China’s auto sales will grow to 28 million to 30 million by 2030, accounting for about 30%-35% of the global auto market, Wollenstein said in an interview. China is a key market for VW, accounting for roughly 40% of its global deliveries in the first quarter. The company employs more than 90,000 people in the country and operates over 40 vehicle and components factories along with partners.
After shipping a record 4.23 million vehicles in China in 2019, VW’s sales slid to 3.3 million in 2021 as the pandemic took a toll. Deliveries have continued on that downward trend, falling 20% to 1.47 million in the first half of this year as Covid outbreaks in Shanghai and Changchun disrupted production. Nevertheless, the company is sticking to its annual sales target of 3.8 million as pent-up demand drives a rebound in sales.
Wollenstein said closed-loop systems that enable staff to work during lockdowns by living onsite are “not sustainable at all” if factories can’t get parts delivered. They only work in a situation where a factory is stocked with parts and can keep operating, he said. Supply chain snarls during lockdowns had a knock-on effect on many manufacturers in China.
Read more: VW Bets on EVs for China Growth as Chip Shortage Hits Sales
The changing of the guard at VW’s China unit comes amid upheaval at head office, with Herbert Diess last week replaced as CEO by Porsche chief Oliver Blume in an abrupt shake-up. Diess has called China the company’s “second home market,” saying VW’s business there generates more than 4 billion euros ($4.2 billion) in profit every year.
Read more: VW Appoints Porsche CEO to Succeed Diess After Tumultuous Tenure
The global auto market has changed massively during Wollenstein’s 14 years in China, he said. The nation is now “the powerhouse of the next generation of automotive trends” including electric vehicles and connected and intelligent cars, he said.
To that end, VW is realigning its China management, led by incoming CEO Ralf Brandstaetter, to give it more autonomy and streamline decision making.
China’s consumers are being spoiled for choice, particularly in EVs, from upstarts Nio Inc. and Xpeng Inc. whose feature-packed cars and lifestyle accessories are attracting customers; BYD Co., whose sales of pure-electric and plug in hybrids are surging, and EV pioneer Tesla Inc., which has bounced back strongly from Covid lockdowns.
“This is all in the race of standing out and making a difference to be seen and having a chance to last,” Wollenstein said of his Chinese competitors.
VW plans to hire 1,000 engineers in China by the end of this year, including in software, and will look at acquisitions and partnerships to expand, he said. VW’s software unit Cariad also entered China this year, its first step outside Europe.
“I am often joking that I’m not so sure whether we are the most international Chinese carmaker or the most Chinese international carmaker,” Wollenstein said.
The automaker has also taken steps to shore up supply chains after being hit by the global semiconductor shortage and surging competition for metals used in EV batteries. It has formed a partnership with STMicroelectronics NV to jointly develop chips, and struck agreements with Zhejiang Huayou Cobalt Co. and Tsingshan Holding Group Co. to help secure nickel and cobalt.
One of the biggest challenges for Brandstaetter will be to balance VW’s presence in Xinjiang — where it operates a car factory and faces mounting pressure to address allegations that ethnic Uyghurs are suffering from coercive labor practices — with local demands to remain in the region.
“Whatever way we turn on the tiny operation in Xinjiang we can never make it right to both stakeholder sides,” Wollenstein said.
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