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Volkswagen’s XPeng deal models West-China EV alliance

Volkswagen’s $700 million investment in China’s electric vehicle startup XPeng is this week’s auto industry news. This partnership could set a precedent for Western automakers looking to leverage Chinese firms’ EV expertise, while Chinese firms can benefit from their foreign allies’ global distribution.

Volkswagen will produce two battery-powered models using XPeng’s technologies. XPeng’s vehicle-to-anything (V2X) and XNGP solutions, ADAS system, and battery chassis architecture are examples.

XPeng is known for its advanced technology, but its sales are far behind Tesla and BYD. The Guangzhou automaker has invested heavily in its own autonomous vehicle technology to stand out in the heated EV race, while its competitors often partner with AV startups.

Volkswagen acquires a 5% stake in XPeng to gain access to its AV expertise, battery, and smart cabin technology, which software-focused AV companies cannot provide.

This partnership helps XPeng adopt. According to China’s passenger car industry association, its customer base is still small, with 2.1% of the new energy vehicle (including hybrids) market in 2022. Volkswagen’s two local joint ventures took 15% of China’s retail auto market last year.

If the two new models succeed, the partnership can scale XPeng’s AV systems to more users, collect more data, and improve its algorithms, creating a data feedback loop like Tesla’s. Volkswagen’s China plug-ins have failed. Last year, its EVs made up only 3% of the new energy vehicle market.

XPeng may expand globally with this deal. Morgan Stanley analyst Tim Hsiao told investors that this type of cooperation is “expected to lay the foundation for Chinese carmakers’ overseas expansion” and “could open up more opportunities for future collaboration with the Volkswagen Group in China and around the world” for XPeng.

XPeng and Nio have aggressively expanded overseas, but their global businesses have yet to take off. Volkswagen may launch the two joint models in other markets if they succeed. This investment may be a win-win for other Chinese EV makers and global OEMs.

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