Volkswagen’s Strategic Shift in EVs: Affordable SUVs as a Catalyst for Growth

The European electric vehicle (EV) market is undergoing a seismic shift. By the first half of 2025, Chinese automakers had nearly doubled their combined market share to 5.1%, challenging legacy European brands like Volkswagen. Brands such as BYD, Jaecoo, and Xpeng are leveraging aggressive pricing and rapid innovation to capture segments where brand loyalty is weaker, particularly in the UK and Southern Europe [1]. Yet, Volkswagen remains a dominant force, holding a 28% share of the European EV market and delivering 465,500 battery-electric vehicles (BEVs) globally in H1 2025, with European growth outpacing the global average by 89% [3]. The question for investors is whether Volkswagen’s strategic pivot toward affordable SUVs can sustain its leadership amid intensifying competition.

The Chinese Challenge: Pricing Power and Speed

Chinese EVs are reshaping the European market through cost efficiency and agility. BYD, for instance, slashed the price of its Seagull model to €26,000 in Europe—just €1,000 above Volkswagen’s ID.2 SUV—while maintaining advanced features like AI-powered infotainment systems [2]. This pricing strategy is underpinned by vertical integration: BYD produces over 70% of its components in-house, reducing costs and shortening development cycles to 18 months compared to Volkswagen’s five years [2]. The result? Chinese brands now outsell traditional automakers like Suzuki and Jeep in Europe, with BYD’s sales surging 311% year-on-year [1].

The European Union’s response—tariffs as high as 45% on Chinese EVs—risks backfiring. Analysts warn that such measures may push Chinese automakers to establish local manufacturing hubs, as seen with SAIC’s MG plant in the UK [1]. This would erode the cost advantages of tariffs while allowing Chinese brands to bypass regulatory hurdles. For Volkswagen, the challenge is twofold: defend its premium segments while countering price-sensitive buyers.

Volkswagen’s Counterstrategy: Affordable SUVs and Technological Partnerships

Volkswagen’s answer lies in its aggressive pricing strategy for entry-level EVs. The ID.2 SUV, priced at €25,000, is the first of a planned lineup of models under €25,000 by 2025, including the ID.1 (€20,000) by 2026 [4]. These vehicles target urban buyers, offering ranges of up to 420 km (ID. CROSS Concept) and a design philosophy focused on “stability, likeability, and secret sauce” to ensure broad appeal [4]. By 2027, Volkswagen aims to launch nine new models, including four small EVs, to solidify its mass-market position [4].

To stay ahead technologically, Volkswagen has partnered with Chinese rival XPeng. The collaboration centers on the China Electronic Architecture (CEA), a next-generation platform enabling faster software updates and reduced development timelines [1]. This architecture, initially deployed in China, will extend to Volkswagen’s ICE and PHEV models by 2027, blending cost efficiency with cutting-edge digital features [3]. Such partnerships highlight Volkswagen’s pragmatic approach: rather than resisting Chinese innovation, it is integrating it into its own ecosystem.

Cost Management and Long-Term Viability

Volkswagen’s cost strategy hinges on localized production and sustainable manufacturing. The ID.2 and ID.1 are built in Europe, reducing logistics costs and aligning with EU green policies. Meanwhile, the company’s MEB platform is being adapted for front-wheel-drive configurations, further cutting expenses [4]. These measures are critical in a market where battery prices have fallen by 30% since 2022, squeezing margins for automakers that failed to optimize production [3].

However, Volkswagen faces headwinds. While its BEV orders in Western Europe rose 62% year-on-year in H1 2025 [6], Chinese brands are closing the gap in mid-market SUVs. For example, Xpeng’s G9 achieved an 81% Net Promoter Score in Germany, signaling strong customer satisfaction [5]. Volkswagen must balance affordability with brand perception, ensuring its entry-level models do not dilute the premium image of Audi and Skoda.

Investment Implications

Volkswagen’s strategic shift positions it as a hybrid player: a mass-market leader in affordability and a technologically agile competitor. Its partnerships with Chinese firms, while counterintuitive, reflect a recognition that innovation is no longer confined to Western automakers. For investors, the key metrics to watch are:
1. Market Share Retention: Can Volkswagen maintain its 28% European EV share as Chinese brands target the 10% threshold [1]?
2. Cost Efficiency: Will localized production and the CEA platform reduce per-unit costs below those of Chinese rivals?
3. Product Pipeline: The success of the ID.1 and ID.2 in 2026-2027 will determine whether Volkswagen can dominate the €20,000-€25,000 segment.

The European EV market is a high-stakes arena where pricing, technology, and regulatory shifts collide. Volkswagen’s ability to adapt—without sacrificing profitability—will define its long-term competitiveness. For now, its strategic focus on affordable SUVs and cross-border partnerships offers a compelling case for resilience.

Source:
[1] Chinese EVs Winning Big Across Europe, But Germany Resists [https://www.forbes.com/sites/neilwinton/2025/07/30/chinese-evs-winning-big-across-europe-but-germany-resists/]
[2] Chinese EV Giants BYD And Chery Outpace Tesla, GM, And ... [https://evxl.co/2025/07/03/chinese-ev-giants-byd-chery-outpace-tesla-gm-vw/]
[3] Trends in electric car affordability – Global EV Outlook 2025 [https://www.iea.org/reports/global-ev-outlook-2025/trends-in-electric-car-affordability]
[4] Volkswagen ID. EVERY1: $21.5k EV targets mass-market ... [https://www.cardivision.com/volkswagen/volkswagen-id-every1-215k-ev-targets-mass-market-europe]
[5] Driven by Technology + Global Strategy, XPeng G7 [https://www.itiger.com/news/1105682681]
[6] Volkswagen Group delivers solid results in challenging environment [https://www.volkswagen-group.com/en/press-releases/volkswagen-group-delivers-solid-results-in-challenging-environment-19501]