Risks of Partnering With Local Companies

Global automakers are doubling down on partnerships with Chinese companies to survive in the world’s largest car market, but the strategy carries significant risks as domestic brands dominate and technology races ahead.

Foreign automakers—from Volkswagen to Hyundai—have seen sales plummet by up to two-thirds since the pandemic, with Chinese brands now controlling nearly 70% of passenger vehicle sales and over 85% of the new energy vehicle (NEV) market. The shift is forcing legacy manufacturers to adopt a new mantra: in China, for China, as they scramble to integrate Chinese technology, localize production and compete on China Speed—the industry term for the breakneck pace of innovation in the world’s fastest-evolving automotive market.

Market Share Collapse and the Tech Gap

Foreign automakers briefly reclaimed market share in early 2026 after China ended purchase tax exemptions and trade-in incentives for new energy vehicles at the end of 2025. However, the rebound was temporary. Domestic brands like BYD, Geely, and NIO—once inflated by subsidies—now dominate, with BYD’s sales dropping by over 40% in the first two months of 2026 alone. Volkswagen, Toyota, and Hyundai, whose sales rely more on conventional and hybrid models, have seen their market share shrink by roughly a third in five years.

Skoda’s exit from China by mid-2026, after sales collapsed by 95% since 2018, and Honda’s five-year sales decline underscore the severity of the crisis. Volkswagen’s two joint ventures delivered 2.69 million vehicles in 2025, down 8% year-over-year, while Nissan’s March 2026 sales were down 47% compared to March 2019.

A New Strategy: Localization and Tech Partnerships

At the 2026 Beijing Auto Show, foreign automakers unveiled a wave of new models co-developed with Chinese tech partners. Volkswagen announced plans to launch more than 20 EVs in China this year and 50 by 2030, including the ID.UNYX 09, co-developed with XPeng. Hyundai launched its all-electric IONIQ brand in China, featuring autonomous driving systems co-developed with Momenta and powered by a Qualcomm Snapdragon 8295 chipset. Cadillac, a General Motors subsidiary, introduced its first luxury electric SUV for China, the VISTIQ, priced at 468,000 yuan ($68,000), with driver-assist technology co-developed with Momenta.

These partnerships reflect a broader trend: foreign automakers are accelerating their R&D in China to close the technology gap. Volkswagen’s new research complex in Hefei, Anhui, houses software teams, battery labs, and full-vehicle testing facilities under one roof, cutting development cycles by nearly one-third and reducing costs by 40%. The company now has direct product decision-making authority in China, aligning more closely with local customer needs and industry benchmarks.

This setup enables faster decision-making, closer alignment with local customer needs, and much shorter development cycles.

Thomas Ulbrich, Chief Technology Officer of Volkswagen Group China

Risks and Rewards

The strategy is not without risks. While foreign automakers gain access to cutting-edge Chinese technology, they also face the challenge of balancing local demands with global standards. Analysts warn that the technology developed in China will inevitably spread worldwide, but the question remains whether foreign brands can retain control over their intellectual property and brand identity.

Stephen Dyer, partner at AlixPartners, notes that foreign brands may struggle to win back significant market share in China but could benefit from exporting Chinese-developed technology to other markets. I think the technology will disseminate throughout the world, he said. I don’t think you can keep it locked up in the bottle of China.

Hyundai’s CEO, José Muñoz, echoed this sentiment, stating that China is where the future of mobility is being defined and that the company aims to help define it, in China, for China, and for the world. Hyundai plans to export its IONIQ brand to Asia-Pacific, Australia, and the Middle East if sales in China perform well.

The Road Ahead

For now, foreign automakers are betting that localization and tech partnerships will help them regain relevance in China. However, the structural challenges remain: Chinese brands control the market, NEV penetration is nearing 54%, and the pace of innovation in China is unmatched. The question is whether foreign automakers can adapt quickly enough—or if they will become permanent underdogs in the world’s largest car market.

One thing is clear: the stakes could not be higher. The automakers that succeed in China will not only secure a critical market but also gain a competitive edge in the global race for automotive innovation.