VW, Toyota, and Hyundai are betting on Chinese technology partners as domestic brands control 70% of the market

In January and February 2026, Volkswagen regained the top position in China’s passenger car market with a 13.9 percent share, slightly overtaking Geely with 13.8 percent. Toyota’s holdings held 7.8 percent. BYD, which reigned in 2024 and 2025 as the world’s largest EV manufacturer, fell to fourth place by 7.1 percent after six consecutive months of sales declines, the biggest drop since the pandemic. The numbers look like foreign returns. They are not like that. They are a subsidy hangover.

China ended its purchase tax exemptions and trade incentives for new energy vehicles by the end of 2025. The expiration affected domestic EV and plug-in hybrid makers because their sales prices were boosted by subsidies that made their cheapest models artificially competitive. BYD’s January sales fell more than 30 percent year-on-year. In February it fell by 41 percent. Volkswagen and Toyota, whose sales depend heavily on conventional gasoline and hybrid models, were not immune. Foreign brands fared no better. The field has been tilted slightly for a while.

Loss ratio

Foreign automakers have lost nearly a third of the Chinese market in five years. Domestic brands now control about 70 percent of passenger car sales, up from less than 40 percent in 2020. New energy vehicles, a category that includes battery electrics, plug-in hybrids, and extended-range models, are expected to account for more than 54 percent of all vehicle sales in China by 2026 with 8V holding more than 5% of Chinese. the market. Foreign brands that once defined the desires of Chinese consumers, Volkswagen, Toyota, Honda, BMW, Mercedes, are now fighting for a shrinking share of the rest.

The real casualties. Skoda confirmed in March that it would pull out of China by mid-2026 after sales fell 95 percent from a peak of 341,000 vehicles in 2018 to 15,000 in 2025. Honda sales fell for the fifth year in a row, down 24 percent from 65,020 to 65,020 in 2020 and 2020 January 2020. 57,489, down 16.5 percent. Volkswagen has been scaling back EV production globally as demand in its domestic market slows, and in China the two joint ventures plan to deliver 2.69 million vehicles by 2025, down 8 percent annually.

The Beijing strategy

The 2026 Beijing Auto Show, which was held in late April in a 380,000 square meter exhibition area with more than 1,000 exhibitors, is where foreigners show what they intend to do with it. The answer, almost universally, was to be more Chinese.

Volkswagen has unveiled the ID.UNYX 09, an electric sedan that has been integrated with Xpengng over two years at VW’s new research and development center in Hefei. The company plans to launch more than 20 EVs in China this year and expand to 50 by 2030 across Volkswagen, Audi, and Jetta models. Hyundai has introduced its all-electric IONIQ model in China with the IONIQ V, which uses an autonomous driving system developed with Chinese AI company Momenta and uses the Qualcomm Snapdragon 8295 chipset. Beijing Hyundai plans 20 new models in China within five years, targeting annual sales of 500,000. Nissan has integrated DeepSeek AI into its N7 electric sedan and announced five new power cars within 12 months.

The pattern isn’t changing: foreign automakers are partnering with Chinese technology companies because they can’t develop competitive software fast enough on their own. Chinese domestic brands update their car software, autonomous driving features, and AI assistants in cycles measured in months. Even Tesla, which also won the quarterly global EV sales crown from BYD in Q1 2026, cannot use its latest Full Self-Driving software in China. BYD’s God’s Eye system has been used in 2.3 million vehicles. Xpeng’s VLA 2.0 has received approvals for level 4 performance testing in Guangzhou. The technology gap that once favored Western automakers has reversed.

What’s different

Toyota is the only Japanese company to grow in China by 2025, selling 1.78 million cars and increasing slowly every year. The change came in two steps: a $15,000 electric car built specifically for the Chinese market, and a hybrid lineup that benefits from the expiration of subsidies because hybrids are cheaper to produce than full-electrics and don’t rely on purchase incentives to compete on prices.

GM reported that it delivered nearly 1.9 million vehicles in China by 2025, up 2.3 percent, and new energy vehicle purchases rose 22.6 percent. Buick is up 54 percent. Cadillac’s LYRIQ deliveries jumped 90 percent. But analysts note that the bulk of GM’s China volume comes from SAIC-GM-Wuling, its joint venture that sells ultra-cheap mini EVs in the thin-margin segment. Vehicles bearing the GM name through SAIC-GM represent about 2.1 percent of the passenger market. The Detroit company, as one analyst put it, is surviving rather than thriving.

A technical problem

Tesla’s global sales decline has opened a window for competitors, but in China that window is being filled by domestic brands, not foreign ones. BYD has sold 4.54 million vehicles by 2025, all new energy vehicles. Geely overtook Volkswagen to become the second largest car manufacturer in China with sales of 2.61 million, driven by NEV growth of more than 80 percent. Xiaomi delivered more than 410,000 cars in its first full year of production and is targeting 550,000 by 2026. These are not legacy automakers bolting electric powertrains onto existing platforms. They are technology companies that make cars, and their competitive advantage is software, not sheet metal.

The Beijing Auto Show made this evident. Horizon Robotics has unveiled its Starry chip, a 5-nanometer automotive-grade processor with 650 TOPS of computing power, and more than a dozen automakers including BYD, Chery, and Volkswagen have expressed interest. The Chinese EV ecosystem has its chip designers, its AI model providers, its autonomous driving stacks, and its battery supply chain. Foreign car manufacturers entering this ecosystem are not competing with individual companies. They compete with an industrial infrastructure designed for electric, smart, connected cars from the ground up.

Question

Volkswagen’s market share recovery in early 2026 is realistic but contextual. The subsidy hangover depressed domestic EV sales in January and February, and BYD’s March figures already show a return to peak sales of 295,693 vehicles. VW’s projections put the real change in their joint ventures in 2027, when it expects the profit contributions to reach two billion euros. The question is whether the market will wait.

Europe’s broader drive to compete with China and the United States is reflected in the automotive strategies of its major manufacturers, but China’s competitive forces are tougher than any other market. Chinese consumers have moved away from thinking that foreign countries mean better. In a market where NEV penetration has topped 54 percent, where autonomous driving features are common in midsize and mid-range domestic cars, and where software updates arrive monthly, the brand equity that Volkswagen and Toyota spent decades building is diminishing faster than the cars themselves.

The foreign brands that survive in China will be the ones who stop trying to sell Chinese consumers what worked in Europe and start building what works in China. Volkswagen’s Xpeng partnership and Hyundai’s partnership with Momenta suggest they understand this. The question is whether localization at this pace is possible for organizations designed to develop cars on five-year cycles in a five-month market. The Beijing Auto Show was full of announcements. The sales figures of 2026 will decide which of those announcements were tricks and which were poetry.