In January and February 2026, Volkswagen reclaimed the top position in China’s passenger vehicle market with a 13.9 per cent share, narrowly ahead of Geely at 13.8 per cent. Toyota’s joint ventures held 7.8 per cent. BYD, which dominated 2024 and much of 2025 as the world’s largest EV maker, slipped to fourth at 7.1 per cent after six consecutive months of declining sales, its steepest drop since the pandemic. The numbers look like a foreign comeback. They are not. They are a subsidy hangover.

China ended its purchase tax exemptions and trade-in incentives for new energy vehicles at the close of 2025. The expiration hit domestic EV and plug-in hybrid makers hardest because their sales volumes had been inflated by subsidies that made their cheapest models artificially competitive. BYD’s January sales fell more than 30 per cent year on year. February fell 41 per cent. Volkswagen and Toyota, whose sales lean more heavily on conventional petrol and hybrid models, were relatively insulated. The foreign brands did not get better. The playing field got temporarily less tilted.

The scale of the loss

Foreign automakers have lost roughly a third of the Chinese market in five years. Domestic brands now control nearly 70 per cent of passenger vehicle sales, up from less than 40 per cent in 2020. New energy vehicles, a category that includes battery electrics, plug-in hybrids, and extended-range models, are expected to account for more than 54 per cent of all car sales in China in 2026. In the NEV segment specifically, Chinese brands hold more than 85 per cent of the market. The foreign brands that once defined aspiration for Chinese consumers, Volkswagen, Toyota, Honda, BMW, Mercedes, are now fighting for the shrinking share that remains.

The casualties are real. Skoda confirmed in March that it will exit China by mid-2026 after sales collapsed 95 per cent from a peak of 341,000 vehicles in 2018 to 15,000 in 2025. Honda’s sales have fallen for five consecutive years, dropping 24 per cent in 2025 to 650,000 units, and its January 2026 volume of 57,489 was down another 16.5 per cent. Volkswagen has been cutting EV production globally as demand in its home markets faltered, and in China its two joint ventures delivered 2.69 million vehicles in 2025, down 8 per cent year on year.

The Beijing strategy

The 2026 Beijing Auto Show, held in late April across 380,000 square metres of exhibition space with more than 1,000 exhibitors, was where the foreign brands showed what they intend to do about it. The answer, almost universally, was to become more Chinese.

Volkswagen unveiled the ID.UNYX 09, an electric sedan co-developed with XPeng in two years at VW’s new research and development centre in Hefei. The company plans to launch more than 20 EVs in China this year and expand to 50 by 2030 across Volkswagen, Audi, and Jetta sub-brands. Hyundai launched its all-electric IONIQ brand in China with the IONIQ V, which uses an autonomous driving system co-developed with Chinese AI company Momenta and runs on a Qualcomm Snapdragon 8295 chipset. Beijing Hyundai plans 20 new models in China over five years, targeting 500,000 annual sales. Nissan integrated DeepSeek AI into its N7 electric sedan and announced five new energy vehicles within 12 months.

The pattern is consistent: foreign automakers are partnering with Chinese technology companies because they cannot develop competitive software fast enough on their own. The Chinese domestic brands update their in-car software, autonomous driving features, and AI assistants on cycles measured in months. Even Tesla, which reclaimed the quarterly global EV sales crown from BYD in Q1 2026, cannot run its latest Full Self-Driving software in China. BYD’s God’s Eye system has been deployed across 2.3 million vehicles. XPeng’s VLA 2.0 has obtained Level 4 pilot operation permits in Guangzhou. The technology gap that once favoured Western automakers has reversed.

The exceptions

Toyota is the only Japanese automaker that grew in China in 2025, selling 1.78 million vehicles for a slight year-on-year increase. The turnaround came from two moves: a $15,000 electric vehicle built specifically for the Chinese market, and a hybrid lineup that benefits from the subsidy expiration because hybrids are cheaper to produce than full electrics and do not depend on purchase incentives to be price-competitive.

GM reported nearly 1.9 million deliveries in China in 2025, up 2.3 per cent, with new energy vehicle sales rising 22.6 per cent. Buick surged 54 per cent. Cadillac’s LYRIQ deliveries jumped 90 per cent. But analysts note that the bulk of GM’s China volume comes from SAIC-GM-Wuling, its joint venture that sells ultra-low-cost mini EVs in a segment with razor-thin margins. GM’s own branded vehicles through SAIC-GM represent roughly 2.1 per cent of the passenger market. The Detroit company is, as one analyst put it, surviving rather than thriving.

The technology problem

Tesla’s global sales slump has opened a window for competitors, but in China that window is being filled by domestic brands, not foreign ones. BYD sold 4.54 million vehicles in 2025, all of them new energy vehicles. Geely overtook Volkswagen to become the second-largest automaker in China with 2.61 million sales, driven by NEV growth exceeding 80 per cent. Xiaomi delivered more than 410,000 cars in its first full year of production and is targeting 550,000 in 2026. These are not legacy automakers bolting electric powertrains onto existing platforms. They are technology companies that happen to make cars, and their competitive advantage is software, not sheet metal.

The Beijing Auto Show made this visible. Horizon Robotics introduced its Starry chip, a 5-nanometre automotive-grade processor with 650 TOPS of computing power, and more than ten automakers including BYD, Chery, and Volkswagen expressed interest. The Chinese EV ecosystem has its own chip designers, its own AI model providers, its own autonomous driving stacks, and its own battery supply chain. Foreign automakers entering this ecosystem are not competing against individual companies. They are competing against an industrial infrastructure that has been optimised for electric, intelligent, connected vehicles from the ground up.

The question

Volkswagen’s early 2026 market share recovery is real but contextual. The subsidy hangover suppressed domestic EV sales in January and February, and BYD’s March figures already showed a return to the top of the rankings with 295,693 vehicles sold. VW’s own projections place the true turning point for its joint ventures in 2027, when it expects profit contributions to reach 2 billion euros. The question is whether the market will wait.

Europe’s broader push to compete with China and the United States is mirrored in the automotive strategies of its largest manufacturers, but the competitive dynamics in China are harsher than in any other market. Chinese consumers have moved on from the assumption that foreign means better. In a market where NEV penetration is heading past 54 per cent, where autonomous driving features are standard on mid-range domestic vehicles, and where software updates arrive monthly, the brand equity that Volkswagen and Toyota spent decades building is depreciating faster than the cars themselves.

The foreign brands that survive in China will be the ones that stop trying to sell Chinese consumers what worked in Europe and start building what works in China. Volkswagen’s XPeng partnership and Hyundai’s Momenta collaboration suggest they understand this. The question is whether localisation at this speed is possible for organisations designed to develop vehicles on five-year cycles in a market that moves in five-month ones. The Beijing Auto Show was full of announcements. The sales figures for the rest of 2026 will determine which of those announcements were strategies and which were eulogies.