In 1984, Volkswagen 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.

Volkswagen Group today maintains the original joint ventures it made with Chinese automakers in those early days of its foray into what has become the world’s largest car market. But the fact that it is now relying on firms such as Chinese EV maker Xpeng for hardware and software underscore how the balance of power in the automotive industry is shifting toward the companies that produce these now high-value components. Chinese companies are proving they can do it faster, often cheaper, than anyone else.

VW Group, which has for much of the last few decades been a top-selling brand in China, has lately struggled to maintain its position.

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

It is not a unique issue. Essentially every non-Chinese automaker is watching market share erode in the country as homegrown companies create vehicles that more directly serve what Chinese customers want.

In particular, Chinese buyers have a taste for what are often called “software-defined vehicles.” They are connected and updatable, and essentially allow drivers to do everything through a car they would do through a phone.

“The Chinese vehicle owner can do his banking using voice commands or order takeout to meet him when he arrives at his house, or do any number of things that seem a little unusual to us here in the West, because we just aren’t built that way,” said AutoForecast Solutions analyst Conrad Layson. “However, the Chinese buyer can’t do that in a Chinese-built Volkswagen, so they went where the convenience was. They were able to bring their digital lives along with them into and out of the car.”

VW’s own struggles to build an in-house software division have been widely documented — after years of effort and billions spent, the company abandoned its go-it-alone approach and turned to collaborations. Xpeng is a major partner in China, while in North America and elsewhere, VW has partnered with Rivian to build cars.

Xpeng, which makes its own vehicles as well, helped VW’s China division build a hardware and firmware architecture called CEA for the German company’s vehicles in the country.

In February, news broke that VW Group would be the first customer for Xpeng’s VLA 2.0 automated driver assistance system. If it performs as advertised, it will equal or surpass anything made by any other global automaker, Layson said.

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

The two companies brought the vehicle to production car in 24 months, the CEA architecture in just 18. That is “unheard of in the West,” Layson said. “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 significant refresh.

Rivian and VW are collaborating on just about all of the same things the German automaker is doing with Xpeng. The deal has given Rivian a roughly $6 billion lifeline at a time when the EV maker is ramping up the production of its mid-priced, higher volume R2 SUV.

The comparisons between the two companies indicate how far Chinese automakers have come, said Tu Le, founder of Sino Auto Insights, a firm that researches the Chinese automotive market.

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

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

Though Xpeng has a technological edge, its partnership with VW does not necessarily pose an immediate threat to Rivian — at least in North America, he added.

Trade disputes and political tension are spurring carmakers to strike these different partnerships. For example, the U.S. has banned certain kinds of Chinese software and hardware for connected vehicles.

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

Companies such as Tesla, Rivian and Lucid Motors are at the forefront of building these kinds of connected vehicles outside of China.

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

“The question probably you should ask is do they use Rivian stack or Xpeng stack in Europe, because we know that they’re going to use Xpeng in China. And we know that for the time being, they’re going to use, in North America, the Rivian stack. But ultimately whose is better, whose is probably more robust and more appropriate?” Le said.

He added that the long-term risk for a company like Volkswagen — or Stellantis, which has partnered with Chinese automaker Leapmotor — is that they become essentially contract manufacturers, Le said. That would come to fruition if the high-value components like software and technology that define the modern vehicle are increasingly made in China.

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

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