Volkswagen Faces Its Biggest Competitive Test Yet as Chinese Carmakers Advance

Volkswagen is preparing for the largest restructuring in its 89-year history as Europe’s biggest carmaker confronts falling profits, excess capacity and rapidly growing competition from China.

The group’s supervisory board has approved another 50,000 job cuts, bringing planned reductions to around 100,000 positions. Volkswagen is also reconsidering the future of four German plants and plans to halve its model portfolio while reducing product complexity by around 75% by 2035.

The scale of the restructuring shows how serious the pressure has become. Yet Volkswagen has faced powerful foreign competitors before.

Japanese carmakers challenged Europe’s automotive industry from the 1970s onwards with efficient production, reliability and competitive pricing. South Korean manufacturers followed, gradually moving from inexpensive alternatives into serious competitors across mainstream and premium segments.

Volkswagen survived both challenges.

The question is whether the Chinese challenge is different.

This Is Not Volkswagen’s First Foreign Competitor

Competition itself is not evidence of an unfair market.

Toyota, Honda, Hyundai and Kia forced European manufacturers to improve. Their success ultimately gave consumers more choice and pushed established companies to compete on quality, efficiency, technology and price.

Chinese automakers should not be treated differently simply because they have developed attractive electric vehicles or found ways to manufacture them more cheaply.

And Volkswagen cannot blame China for all its problems.

The company acknowledges that its European factories have capacity to produce more than 500,000 vehicles beyond current demand. It wants to simplify an enormous corporate structure, reduce its model range, and improve an operating margin that stood at only 3.8% in the first half of 2026.

Volkswagen must solve these problems itself. But Europe’s current challenge goes beyond another generation of foreign automakers becoming more competitive.

China’s Advantage Is Broader Than Cheap Cars

Chinese manufacturers have developed formidable strengths in batteries, electrification, software, supply chains and rapid product development.

That achievement should not be underestimated. China spent years building an EV ecosystem while many established manufacturers remained dependent on profitable combustion-engine vehicles.

The results are increasingly visible outside China.

Chinese automakers’ share of Europe’s passenger vehicle market increased from around 3% to 16% between the first quarters of 2022 and 2026, according to Counterpoint Research data cited by Reuters. In electric vehicles, their position is even stronger, accounting for nearly a quarter of European EV shipments.

But another element shapes the competition.

The European Commission’s investigation into Chinese battery electric vehicles concluded that the Chinese EV value chain benefits from subsidies that threaten economic injury to European producers. The EU subsequently introduced countervailing duties on Chinese EV imports.

Meanwhile, China’s enormous manufacturing capacity is increasingly looking abroad. Domestic Chinese car sales fell by 20% in the first half of 2026, while exports increased 71%.

This combination of industrial scale, excess capacity and state support creates a challenge that ordinary competition policy cannot simply ignore.

Europe Has Seen This Story in Solar Panels

A warning much closer to home.

Europe was once a significant producer of solar technology. But European manufacturers struggled as enormous Chinese production capacity and falling prices transformed the industry. Today, China dominates most stages of the global solar photovoltaic supply chain.

Cheap imports undoubtedly benefited consumers and accelerated renewable-energy deployment. But Europe also lost much of an industry it now considers strategically important.

Cars are considerably more consequential to Europe’s industrial economy.

The automotive sector supports manufacturing plants, suppliers, engineering expertise, software development and hundreds of thousands of highly skilled jobs. Allowing a strategically important industry to become structurally uncompetitive before addressing distorted market conditions would be difficult to reverse later.

The United States is already considering a much harder approach. The Alliance for Automotive Innovation, representing major American manufacturers, recently urged Congress to permanently prohibit Chinese connected vehicles, hardware, and software from the U.S. market, citing unfair trade practices and national-security concerns.

Europe does not necessarily need to follow the American model. A blanket ban would carry its own costs and reduce competition for consumers. But Europe does need to decide what fair competition should look like.

Protection Cannot Replace Competitiveness

Trade measures alone will not rescue Volkswagen. If European manufacturers produce cars that are too expensive, develop software too slowly or fail to offer EVs consumers want, tariffs cannot solve those problems indefinitely.

Chinese companies deserve credit for moving quickly in electrification, batteries and vehicle technology. European manufacturers need to respond with better products, simpler organizations, faster development and lower production costs.

Volkswagen’s restructuring is therefore necessary regardless of what Brussels does.

But demanding that European companies become more competitive does not require Europe to accept every competitive condition as fair.

There is a difference between protecting an inefficient company from better rivals and ensuring that companies compete under reasonably comparable market conditions.

The Next Industrial Test for Europe

Volkswagen’s crisis should therefore be viewed as more than a story about one oversized German corporation cutting costs.

It is also a test of European industrial policy. Europe needs affordable electric vehicles if it wants consumers to move away from combustion engines. Chinese manufacturers can contribute to that transition and can pressure European companies to improve.

At the same time, Europe has a legitimate interest in preserving industrial capabilities that would be extremely difficult to rebuild once lost.

The right response lies somewhere between closing the market and pretending that industrial subsidies, excess capacity and strategic state support have no effect on competition.

Volkswagen survived the Japanese and Korean competitive challenges because the company adapted. It will have to adapt again.

But Europe should also learn from industries it has already lost. Competition can make companies stronger. Competition distorted by structural state support can produce a very different outcome.

By the time that distinction becomes visible in shuttered factories and vanished supply chains, fixing it may already be far more difficult.