| Thanks for reading Hyperdrive, Bloomberg's newsletter on the future of the auto world. Read today's featured story in full online here. Ryan Xu was a dream customer for Germany's automakers. The Guangdong-based entrepreneur and her husband own a Porsche 911 and a Mercedes-Benz G-Class and were among the first buyers of the electric Porsche Taycan. But her views on German cars have soured along with Chinese consumers who increasingly favor tech refinement over traditional selling points like horsepower and handling. The software systems in the Taycan, which costs well over $100,000, were "terrible," the 36-year-old mother of three said. It was "just an electrified Porsche — and that's it." Her assessment isn't isolated. As China moves away from combustion-engine cars, Volkswagen, Mercedes and BMW are struggling to offer EVs that appeal to customers in their largest and most lucrative market, putting €35 billion ($38 billion) of investment on the line. The latest warning signs came last week, when all three German manufacturers reported slumping third-quarter deliveries in China. BMW posted its steepest drop there in more than four years — a 30% plunge — and Mercedes' deliveries declined 13% amid poor demand for its priciest cars, including S-Class and Maybach limousines. Porsche's sales in China tumbled 19%, its worst third-quarter performance in a decade, as global demand for the Taycan nearly halved. Volkswagen — the parent of Porsche and Audi — reported a 15% decline. "The competitive situation in China is particularly intense," said Marco Schubert, who oversees sales for VW. After dominating the gas-guzzler era, German manufacturers became complacent, underestimating the threats posed by new rivals and reluctant to abandon the profits generated by big-engine cars. That allowed Tesla and local manufacturers led by BYD to speed by with tech-savvy and affordable plug-ins. "The turning point is happening now for these automakers," said Stephen Dyer, a Shanghai-based managing director at consultant AlixPartners. "They need to dramatically change their strategy in the market." The next challenge is already on display at this week's Paris auto show, where Chinese manufacturers are stepping up their efforts to take market share in Europe. Companies including BYD and Xpeng are showcasing their latest technology at the biggest European car event this year. At least one response effort didn't go as planned. The microphone and slideshow cut out for several minutes in the midst of VW's presentation about future electric vehicles, leaving sales and marketing chief Martin Sander visibly frustrated. It's an emotion shared by drivers in China. After dealing with braking and other quality issues, the Xu family sold their Taycan and bought a Nio ET5. The car was about a third cheaper than a Mercedes EQE, which Xu also considered, but offered a more luxurious interior design, smooth voice controls and greeted their kids by name as they climbed in. "German cars can hardly match" that level of technology, said Xu, who runs a business with her husband. Mercedes, BMW and Audi "can hardly be seen as luxury cars now." While German automakers still control almost 15% of the Chinese market, that's down from a quarter before the pandemic. Worse yet, their share of EVs is less than 10%. Without a quick turnaround, the slump risks turning into a rout and tipping Germany's Big Three into an existential fight. Urgency among Germany's auto executives started to intensify in late 2022. After VW's China chief Ralf Brandstätter warned the supervisory board that Chinese carmakers had leaped ahead, the company chartered flights to send hundreds of staff to the 2023 Shanghai auto show — the event's first installment after years of Covid lockdowns — to see for themselves. It was a sobering reality check. The executives were confronted with a rapid rollout of affordable Chinese models, tech-loaded products and an intensified price war. Gimmicky innovations, like a hopping sports car and in-car karaoke, may have been quirky but reset expectations among Chinese consumers with respect to who was driving automotive trends. An intense competitive response followed. A few weeks after the show, VW CEO Oliver Blume ousted the head of the company's software unit Cariad. Alongside new Chinese partnerships for autonomous driving, infotainment and user experience, VW also invested in Guangzhou-based Xpeng to underpin plans to build cars using the startup's EV expertise.  Xpeng CEO He Xiaopeng with VW's China chief Ralf Brandstätter at a media event in Beijing this April. Source: Bloomberg After a profit warning this September, one of the first actions Mercedes CEO Ola Källenius took was to fly to China to check on progress in reshaping its presence there, including tapping CATL for batteries and Tencent for digital services. BMW, meanwhile, is joining forces with Great Wall Motor to build EVs for its Mini brand. The cumulative result is that German cars will become progressively less German in their largest market. The expansion is also exactly the opposite of the government's aim to reduce exposure to China, according to Gregor Sebastian, an analyst at Rhodium Group. Clinging to their position in China is "a huge gamble," Sebastian said, noting that the German state might need to bail them out if it all goes wrong. "They're hoping they're too big to fail." While Chinese consumers eagerly bought up German cars for years, the market has changed and reclaiming that enthusiasm from clientele that's younger and more tech-oriented than in Europe is a major challenge. What that means for Germany can be seen inside a production hall at Mercedes' Sindelfingen site, near Stuttgart. It's home to the flagship S-Class, long a favorite of China's nouveau riche. But demand has slumped and production has been reduced to a single shift for the first time.  Mercedes' Sindelfingen site, near Stuttgart. Photographer: Krisztian Bocsi/Bloomberg While cost-cutting has started to roll over Germany's auto industry — most notably with VW's threats to close factories in its homeland — Chinese operations have been insulated. It's a sign executives are hopeful for a turnaround, though they also have little choice. Downsizing in China is difficult because large-scale job cuts often need to be discussed with domestic partners and approved by local authorities, which have little incentive to be cooperative. More drastic changes, like shutting a plant, is even harder. Land in China is owned by the government, and that means a factory can't simply be shuttered and sold — even if a buyer can be found. The case of Hyundai's exit from a plant in Chongqing illustrates the risk. After several attempts to sell the factory building and machinery, the company ultimately accepted an offer from the local state-operated industrial zone for a fifth of its investment.  The production line at the Volkswagen Anhui Automotive factory in Hefei. Photographer: Qilai Shen/Bloomberg This puts pressure on Germany's carmakers to revive sales even as the playing field tilts in favor of domestic players. Beijing has directed several key state-owned automakers, including VW partner FAW Group, to prioritize technology and market share over profitability. That's hardly an option for Germany's publicly listed carmakers. The downturn might have been prevented by more forward-looking investment in the Chinese market. But after Germany's decades at the pinnacle of the auto industry, Chinese rivals weren't taken seriously, and local insight was bypassed as decisions were funneled through boardrooms thousands of miles away. There also wasn't enough attention paid to the fact that the switch to EVs was about more than swapping out one powertrain for another, and early software was buggy. VW, for instance, only managed to turn on over-the-air updates years after launching its first Chinese electric model in 2020. Zhou, an IT engineer living in Wuhan, had to endure frustration with this after buying an ID.4 in early 2022. With screens going black several times in the middle of driving, he got glitches instead of German quality. Updates also were regularly behind schedule or available only via the dealer. He's now seeking a replacement. It will be another EV, but this time "I won't visit any German dealerships," he said. "I'll only go for local brands, or Tesla." — By Chunying Zhang and William Wilkes  Hongqi EH7 and EHS7 electric vehicles at the Paris motor show. Photographer: Nathan Laine/Bloomberg  A salesperson speaks with a customer in the showroom at Audi Omaha in Nebraska. Photographer: Dan Brouillette/Bloomberg Amid the onslaught of Donald Trump and Kamala Harris ads flooding Michigan's airwaves ahead of the US election, there's been a six-figure TV blitz aimed at convincing swing-state voters on the merits of buying electric vehicles. "Forget the political noise," the 30-second ad says, flashing photos of factory workers over clips of Trump railing on EVs. "EVs mean good American jobs." Electric cars have a "Republican problem," says longtime GOP strategist Mike Murphy, who started an advocacy group that's coordinating with carmakers to speed up adoption in red states, where sales have lagged. Murphy says even a recent influx of appearances from Tesla's Elon Musk alongside Trump hasn't helped reverse decades of derision against plug-in vehicles. | 
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