Volkswagen Xpeng deal shows threat to Rivian, U.S. automakers

in 1984 volkswagen It partnered with a Chinese automaker because it was required by Chinese law.

Now the German company is partnering with Chinese automakers because it wants to use their technology.

The Volkswagen Group continues today with its original joint ventures with Chinese automakers in the early days of its entry into what has become the world’s largest automobile market. However, the fact that it now trusts companies such as the Chinese electric vehicle manufacturer xpeng It highlights how the balance of power in the automotive industry for hardware and software is now shifting towards companies producing high-value components. Chinese companies are proving they can do this faster and often cheaper than anyone else.

VW Group, one of the best-selling brands in China for the last few decades, has been struggling to maintain its position lately.

Volkswagen’s profits in China fell nearly 45 percent in 2025, from about $2 billion to $1.1 billion. The company said in its annual report that it now faces intense competition from Chinese companies.

This is not a unique problem. Essentially every non-Chinese automaker is watching its market share shrink in the country as domestic companies create vehicles that more directly serve the wants of Chinese customers.

Chinese buyers in particular enjoy what are often called “software-defined vehicles.” They’re connected and updateable, and they essentially allow drivers to do everything through a car that they would do via a phone.

“The Chinese owner can use voice commands to meet him/her when he/she arrives at home to do their banking or order takeout or do a lot of things that seem a little bit unusual to us here in the West, because we’re not built that way,” said AutoForecast Solutions analyst Conrad Layson. “But the Chinese buyer couldn’t do that in a Chinese-made Volkswagen, so they went where it fit. They were able to move their digital life in and out of the car, too.”

VW’s struggles to establish an in-house software division have been widely documented; After years of effort and spending billions of dollars, the company abandoned its stand-alone approach and turned to collaborations. Xpeng is a major partner in China; In North America and elsewhere, VW rivya building cars.

Xpeng, which also produces its own vehicles, helped VW’s China division create a hardware and firmware architecture, called CEA, for the German company’s vehicles in the country.

In February, news broke that VW Group would become the first customer of Xpeng’s VLA 2.0 automatic driver assistance system. If it performs as advertised, it will equal or exceed anything produced by any other global automaker, Layson said.

Then in March, the ID.UNYX 08, the first vehicle jointly developed by the two companies, rolled off the assembly line.

The two companies brought the vehicle to the production car in 24 months, and the CEA architecture in just 18 months. Layson said this was “unheard of in the West.” “But that’s China’s speed for you.”

Global automakers typically require a three- to five-year timeline for a new vehicle, or even a major refresh.

Rivian and VW are collaborating on pretty much the same things the German automaker is doing with Xpeng. The deal gives Rivian a lifeline worth about $6 billion at a time when the EV maker is ramping up production of the mid-priced, high-volume R2 SUV.

Tu Le, founder of Sino Auto Insights, which researches the Chinese automotive market, said comparisons between the two companies show how far Chinese automakers have come.

For example, Rivian is working on its own chips. So is Xpeng, but its chip is already being produced.

“Xpeng is already there and Rivian wants to go there,” Le said.

He added that although Xpeng has the technological edge, its partnership with VW does not necessarily pose an immediate threat to Rivian; at least in North America.

Trade disputes and political tension are encouraging automakers to turn to these different partnerships. For example, the US has banned certain types of Chinese software and hardware for connected vehicles.

The long-term picture is uncertain. Xpeng, like all Chinese automakers, wants to compete globally and not just through partnerships with other automakers. For example, the company started selling two models in Mexico on March 25.

Companies like Tesla’s, rivya And Lucid Engines We are at the forefront of building these types of connected vehicles outside of China.

Still, if Chinese firms can prove they can outperform Western firms in their home markets and export those features to other markets, VW may face a tough choice down the road.

“The question you probably need to ask is, are they using the Rivian stack or the Xpeng stack in Europe, because we know in China they’re going to use Le said.

The long-term risk for a company like Volkswagen is – or StellantisFormed a partnership with a Chinese automaker bounce engine What they do is essentially become contract manufacturers, Le said. This will be possible when high-value components such as the software and technology that define the modern vehicle are increasingly produced in China.

“My question would be: If Xpeng fires on all cylinders, will they need the Volkswagen Group?” Le said. “The shoe is on the other foot. And I think more and more people are starting to realize that this is real. Their products are important and a threat to our livelihoods.”

Neither Rivian, VW Group nor Xpeng responded to CNBC’s request for comment or an interview.