Audi seeks to catch up in China in test of Germany's automotive grit

Audi CEO Markus Duesmann flew to China last week to tackle a problem that is indicative of the challenges facing Germany: how to compete with its biggest trading partner on new technology.

The head of the German luxury brand went to visit Audi's Chinese joint venture partners -- China FAW Group Co. and SAIC Motor Corp. -- to discuss ways to sell more electric vehicles in the world's largest car market. The effort is critical not just for the Volkswagen Group unit but also as a test of Germany's ability to navigate threats to its competitiveness.

Germany's vaunted automakers dominated the combustion-engine era, but the transition to electric vehicles puts their standing at the pinnacle of the auto industry at risk.

Audi, Mercedes-Benz and BMW are ramping up their range of battery-powered models in a critical bid to compete with Tesla and upstarts from China, including BYD and Nio.

"The transition to electric vehicles in China is naturally a challenge for us," Duesmann said in an interview at Audi's headquarters in Ingolstadt. "We haven't participated in the growth in the electric vehicle market as much as we wouldd have liked."

The shift to cleaner technologies presents more than one dilemma for Germany. The war in Ukraine exposed the country's reliance on cheap Russian gas for its energy needs, and the shift to renewable power has been slow. There's also raw materials needed for batteries, which mainly come from China.

That means Germany's automakers need to overhaul their product range and their manufacturing system at the same time.

"Energy costs will be decisive for us, for Germany and for Europe," Duesmann said. "Energy costs play an enormous role in the production of a car. The raw material costs play a huge role."

For years, Germany gratefully sold cars, chemicals and machinery to the Asian superpower, but more recently the tables have turned and the trade deficit is growing.

"China was moving very fast before, and then we as a society weren't watching closely for three years and they have kept moving," Duesmann said. "It's like when you're watching a marathon race and you turn away for 30 seconds and then the competition is somewhere else completely when you look back. That's how it is with China."

In an effort to catch up, Audi is building an electric vehicle plant in Chengchun and has already rolled out its Q4 E-tron and Q5 E-tron Roadjet in China and will add the RS E-tron GT later this year.

But the bulk of its sales are conventional cars.

Audi's deliveries in China slumped 8.4 percent to 643,000 vehicles in 2022, but still comprised 40 percent of its global sales.

Volkswagen's efforts to transition to the new automotive era has been fraught with setbacks, and delivering fresh momentum is among the most pressing tasks for the auto group's new CEO Oliver Blume.

A chaotic software push -- now bundled under the Cariad unit -- has been one of the biggest headaches and reflects the difficulties facing an old-school engineering company to integrate new skills.

For a time, Audi was overseeing an initiative to develop a common operating system across Volkswagen's 12 brands, and customers have grappled with unnerving glitches and trips to the garage instead of receiving over-the-air updates like Tesla.

New software-led common vehicle underpinnings have been postponed by several years with significant delays for key new models like the Audi Q6 E-tron and electric Porsche Macan.

Volkswagen last week revealed a jump in planned spending, partly driven by a push to improve its lineup in China.

"China is the new benchmark for us regarding development time," Duesmann said.

Along with the rest of Europe, Germany is caught between China's growing ambitions and U.S. efforts to lure more investment.

The European Union unveiled a response this week with the Net Zero Industry Act -- a raft of new measures aimed at nurturing green tech and securing raw materials.

The EU needs to find the right answers to maintaining the bloc's industrial competitiveness and avoid being left behind in these shifts, the Audi chief said.

"It's a European question and it's urgent," said Duesmann. "An enormous amount is happening in China and the U.S., and we, of course, can't look away. Otherwise, the marathon runners will have turned the corner, and we won't see them anymore."