How Mercedes, BMW and Audi hope to win back China

(By Caixin journalists Yu Cong and Ding Yi)

For decades, Germany’s luxury car triumvirate — Mercedes-Benz Group AG, BMW AG and Audi AG — reigned supreme in China, leveraging their mastery of the internal combustion engine to lock down the high-end segment of the world’s largest car market.

However, their dominance has faded fast. The Chinese market’s embrace of smart electric vehicles (EVs) over the last few years caught the German giants off guard, creating an opening for their homegrown competitors.

Under the more intense competition from Chinese EV makers, the trio’s sales have slid, leading to profit warnings, layoffs and changes to corporate strategy. To seize back the initiative, the German automakers are launching aggressive, hyper-localised counteroffensives. They are redesigning vehicles, setting up specialised tech centres and stripping away legacy branding to better appeal to the country’s tech-focused buyers.

Mercedes, BMW and Volkswagen AG’s Audi still have two formidable advantages: their brands remain synonymous with luxury among Chinese car buyers and they maintain deep dealership networks that local EV startups have not yet replicated. Furthermore, they are modernising their lineups, incorporating cutting-edge software and autonomous driving capabilities into conventional models to preserve high profit margins.

But the ultimate test for these luxury carmakers is not whether they can adapt new technologies, but rather their corporate DNA. For generations, their global success was built on rigid product hierarchies and multi-year testing cycles designed to ensure flawless reliability. In China’s hyper-accelerated, capital-flush ecosystem, these time-tested philosophies are increasingly seen as liabilities, forcing the German giants to choose between the safety of legacy engineering standards and the speed required to survive.

Getting local

To keep pace with the rapid shift to electrification in China, the three luxury carmakers are moving their engineering and production centres to the Chinese market.

BMW has established an entire electromobility ecosystem in the country, spanning research and development, local supply chains and battery production tailored for its next-generation Neue Klasse EV lineup.

While the inaugural Neue Klasse model — the iX3 SUV — already accounts for roughly one-third of BMW’s pure electric sales in Europe, the automaker has made a big bet on the version designed for the Chinese market. BMW boasts that it has adapted the long-wheelbase version of the iX3 to the local market to a greater extent than any of its models to date. Scheduled for release in the second half of 2026, this version of the iX3 features digital functions co-developed by the brand’s Chinese and global engineering teams.

Audi has adopted a similar strategy to localise its models. In April 2026, the company established its first overseas innovation and technology centre in Shanghai. In partnership with SAIC Motor Corp. Ltd., the facility focuses on development across the entire intelligent connected vehicle (ICV) production chain. It has been tasked with developing vehicles for Audi’s new, China-specific AUDI EV brand.

Unveiled in November 2024, the brand is written in all-caps and intentionally styled without the company’s iconic four-ring logo to signal a clean break from tradition. Tailored for tech-savvy Chinese consumers, the brand aims to lead the ICV segment by integrating artificial intelligence-powered cabins and advanced driver assistance systems into its models.

Mercedes is also revamping its electric lineup after its EQ series fell short of expectations in China. The automaker is preparing to launch its all-electric GLC SUV. To ensure the vehicle satisfies local tech demands, Mercedes has partnered with Chinese smart-car software developer Momenta Global Ltd. to help develop the driver assistance system.

Maintaining an edge

Despite the tougher competition, the German automakers retain structural advantages that can help prevent them from losing more of the Chinese market.

In China, car buying behaviour changes once the price of a vehicle reaches a certain point. For vehicles priced from 100,000 RMB (US$14,700) to 300,000 RMB, buyers prioritise price, range and quality over brand, according to a report by consultancy Deloitte LLP. Above 300,000 RMB, however, brand becomes significantly more important for Chinese car buyers.

In China’s crowded auto market, foreign luxury automakers have another advantage: they give their customers the sense that they’ll be around for the long term, said Ralf Brandstätter, CEO of Volkswagen’s China operations.

Brandstätter predicted that a large number of overextended auto brands will inevitably face a market shakeout after 2030, leaving established players like Audi on firmer ground.

Market data backs up the resilience of the luxury car segment. In May, luxury new energy vehicle (NEV) retail sales in China bucked the broader downturn by surging 8% year-on-year, driven largely by aggressive pricing strategies and highly competitive vehicle configurations.

Crucially, executives noted that conventional fuel-burning cars remain vital to the industry. Jochen Goller, a member of BMW’s board of management, said that the company will not abandon internal combustion engines in China, citing sustained demand in regions like the northeast, where colder winters can hurt the battery life of pure electric cars.

To bridge the gap, the automakers are aggressively retrofitting fossil-fuel models with smart car technologies.

Last year, for example, Audi launched the gasoline-powered A5L through its joint venture with China FAW Group Co. Ltd. The model features Huawei Technologies Co. Ltd.’s advanced driver assistance system.

Duelling philosophies

The biggest hurdle for the German automakers may be corporate philosophies that are not well-suited to a Chinese market where homegrown competitors rapidly update their models.

For example, Mercedes, BMW and Audi have stuck to rigid durability testing protocols. They require new vehicles and their software-driven assisted driving features to undergo two full winters and two full summers of real world environmental exposure before the vehicles can hit the market.

Additionally, the German automakers operate under strict, top-down brand and technology hierarchies. Within Volkswagen, for instance, rigid technological tiers separate mass market brands like Skoda from premium brands such as Audi, and luxury marques like Bentley and Lamborghini. Under this system, certain cutting-edge features are reserved exclusively for high-tier brands.

This leaves the German carmakers at a disadvantage against aggressive Chinese competitors, who frequently deploy premium, next-generation technologies into budget-friendly, mass market models to rapidly capture market share.

Still, adopting the Chinese approach poses its share of pitfalls. Former BMW chairman Oliver Zipse has warned that the current pace of investment in China’s auto industry presents structural risks. Zipse noted that pouring immense capital into launching an unsustainable number of new models over short cycles could jeopardise the long-term health of the business.

This article was first published by Caixin Global as “In Depth: How Mercedes, BMW and Audi Hope to Win Back China”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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