Volkswagen is moving to equip vehicles sold in Europe with software co-developed with Chinese electric-vehicle maker Xpeng. It is a symbolic case of a European automaker importing Chinese technology in reverse, and is seen as a gambit to tackle two challenges at once: cutting costs and shortening development timelines.
Thomas Schäfer, CEO of the Volkswagen brand, plans to present a proposal to the supervisory board to bring the “China Electronic Architecture (CEA)” to Europe as early as soon. According to a report by German business outlet Manager Magazin on the 26th (local time), Volkswagen is considering applying CEA to about 75% of next-generation models across three brands—Volkswagen, Skoda and Cupra. Specific candidates mentioned include the ID. Golf, ID. Passat and Skoda Enyaq.
CEA is an electronic/electrical architecture that integrates and controls a vehicle’s various electronic devices and software. It is a core foundational technology for software-defined vehicles (SDVs), serving as the basis for future feature updates, data utilization and advanced autonomous driving. Until now, the technology has been applied only to vehicles sold in the Chinese market.
If the scope is widened to include European mass-market vehicles, the savings are estimated at €4 billion to €5 billion (approximately $4.5 billion to $5.6 billion). The calculation is that using Chinese software would lower component and development costs while also accelerating development schedules.
Volkswagen has until now run a dual software strategy by market. In China, it uses technology developed with Xpeng, while in Western markets such as Europe it is developing next-generation software in partnership with U.S. electric-vehicle startup Rivian. In 2024, it announced an investment and cooperation plan with Rivian totaling $5.8 billion.
The problem is cost. According to auto outlet Electrifying, developing software at RVT, the joint venture with Rivian, costs about four times as much as development in China. The software being co-developed with Rivian is slated to debut in the compact ID. Every1, due for launch next year, but if Chinese technology expands into Europe’s mass-market segment, the scope of cooperation with Rivian would inevitably shrink.
Volkswagen’s move is also the result of its strategy to build in-house software capabilities running into difficulties. During the EV transition, Volkswagen established software subsidiary Cariad to internalize the technology, but it struggled with development delays and rising costs. In 2024 it pivoted toward cooperation with Rivian, and now it is once again looking at Chinese technology as an alternative.
Large-scale restructuring is also part of the backdrop. At the group level, Volkswagen has set a goal of cutting €20 billion (approximately $22.3 billion) in costs by 2030 to lift its operating margin—which fell to 2.8% last year—to 9%. Last month, management won supervisory board approval for an additional restructuring plan that would cut up to 100,000 of its roughly 660,000 employees worldwide and review the use of four plants in Germany. A directive to freeze wages until 2030 at most sites is also said to have been drawn up.
The shift toward relying on Chinese technology is not unique to Volkswagen. Chinese autonomous-driving software company Momenta is expanding its customer base from German premium brands to European mass-market brands. Last month it formed a strategic partnership with Dongfeng Stellantis Automobile Technology, a joint venture between Stellantis and Dongfeng Motor, to jointly develop advanced driver-assistance technology. The two sides plan to develop systems for new mass-production models from Peugeot and Jeep and supply them not only in China but also to global markets including Europe.
Audi, Volkswagen Group’s premium brand, has also teamed up with China’s SAIC to develop intelligent electric vehicles. The two companies expanded their cooperation this year and established a dedicated innovation and technology center in Shanghai. The plan is to jointly develop four new models based on a next-generation advanced digital platform (ADP) and strengthen competitiveness in technologies such as AI-based smart cockpits and advanced driver-assistance systems.
The assessment emerging is that Chinese companies—which just a few years ago were building “lookalike” cars by imitating the designs and technology of European and American automakers—have now risen to a position where they supply core technology to Western automakers. The analysis is that China’s competitiveness, which began with EVs, has evolved further in step with the spread of autonomous driving and artificial intelligence (AI).
Concerns about technology dependence are also being raised. Because a vehicle’s electronic/electrical architecture and software directly affect future feature updates, data utilization and the advancement of autonomous-driving technology, critics argue that control over core technology could be lost over the long term. Lee Ho-geun, a professor of future automotive engineering at Daeduk University, said, “China has secured a considerable level of reliability while accumulating technological prowess through diverse real-world experience,” adding, “Volkswagen can use China’s proven technology, and Chinese companies can secure a foothold for entering Western markets, so it can be a cooperation that benefits both sides.”
The market is reading the decision as a signal of a reshaping of the European auto industry’s software supply chains. If Volkswagen fully adopts Chinese technology for European mass-market cars, considerable changes are inevitable not only in its joint venture with Rivian but also in how it deploys software development personnel in Europe. On the other hand, it opens a bridgehead for Chinese software companies to enter the European auto market, suggesting the competition for leadership in the global automotive software value chain will intensify further.