HEFEI, China: Volkswagen is trying to reinvent itself in the country that once powered its global success and where it is now fighting to stay relevant.

The German automaker has poured 3 billion euros (US$3.5 billion) into a vast research and development hub in Hefei, central China, marking the biggest overseas investment of its kind. The move underscores how dramatically the balance of power has shifted in the world's largest and most fiercely competitive auto market.

At its peak, Volkswagen commanded more than half of China's car market. Today, fast-moving domestic rivals and a rapid pivot to electric vehicles have eroded that dominance, forcing the company to rethink how it designs, builds, and sells cars in China.

For decades, foreign automakers succeeded by importing vehicle designs from abroad and sharing technology with local joint-venture partners. That model has collapsed under pressure from Chinese brands that innovate faster, cut costs aggressively, and cater closely to local tastes.

"This business model is now gone," Thomas Ulbrich, the chief technology officer of the Volkswagen Group in China, said.

Volkswagen began its strategic overhaul in 2022, acknowledging what Ulbrich describes as a paradigm shift. Instead of adapting global models for China, the company is now developing vehicles specifically for Chinese drivers. These models are unlikely to be sold in Europe, though some could reach the Middle East or Southeast Asia.

As these cars begin to roll out, Volkswagen will learn whether its China-first strategy can help it regain ground lost to domestic champions such as BYD and Geely.

Such localization is essential for staying competitive, said Rella Suskin, an equity analyst at Morningstar who covers European automakers.

But she cautioned that "it will enable them to maintain market share levels in line with current levels, rather than allow them to regain the market share that has been lost over the last few years."

The bigger challenge may be profitability. China's price wars have driven margins so low that even major players are struggling to make money.

Audi, part of the Volkswagen Group, signaled a shift earlier this year by launching a new China-specific brand called "AUDI," spelled entirely in capital letters. Volkswagen plans to follow with new 2026 models developed "in China, for China," as the company puts it.

"It's a million-dollar question whether this strategy will pay off," said Claire Yuan, director of corporate ratings for China autos at S&P Global Ratings. "We have to monitor, but I think they are on the right track to catch up in the race."

Foreign automakers were caught off guard by how quickly China's market transformed. Electric vehicles now account for roughly half of new car sales, and buyers expect cutting-edge digital features, from massive touch screens to advanced autonomous parking systems.

Vehicles that once defined Volkswagen's success, including the Santana and Jetta sedans that dominated taxi fleets and first-time buyers' garages, no longer meet those expectations. China now accounts for about one-third of Volkswagen's global sales, making adaptation critical.

To survive, automakers must move at what has become known as "China speed," said Bill Russo, CEO of Shanghai-based consultancy Automobility.

Chinese EV makers typically bring new models to market in 12 to 18 months, compared with three to five years for global competitors. "The pace is not a choice but a necessity, and that pressure fuels global competitiveness," Russo said.

Ulbrich recalls working in northeastern China in the 1990s, when Volkswagen relied on imported components because local suppliers could not meet its needs. Today, nearly all parts are made and increasingly designed in China.

To accelerate development, Volkswagen has shifted decision-making authority to its China operations. Other foreign automakers have taken different paths. Some have scaled back or exited, while Japan's Toyota has also granted its China team greater autonomy, giving them "unprecedented autonomy in product planning and development," Yuan said.

Volkswagen is also tapping into China's EV ecosystem, partnering with startup Xpeng to speed up model launches and develop its own electronic architecture, the digital backbone that controls vehicle functions.

The strategy reflects a broader realization that innovation flows both ways.

"Knowledge flows are a two-way street between China and Germany," said Martin Hofmann, a Volkswagen executive and chair of the German Chamber of Commerce in North China.

In a recent chamber survey, about half of more than 600 respondents said they expect Chinese competitors to become innovation leaders within five years, while 9 percent said they already are.