How Software Killed Starbucks in China - VW Is Next

Welcome to Issue #94 of The German Autopreneur.

This story starts in 2018. In a Shanghai café.

Starbucks dominated China's coffee market back then. Over 40% market share. Stores packed. Success seemed unstoppable.

Then a new competitor flipped everything in just 5 years. Market share crashed to 14%.

In the same period, German automakers’ market share in China dropped from 24% to 15%.

The story is repeating itself in automotive.

Today I'll show you the strategic mistake both made, how the patterns mirror each other, and why responding is nearly impossible.

Starbucks Conquers China

To understand what happened, we need to go back in time.

In 1999, Starbucks did something many thought impossible. They brought expensive coffee to China. To a 4,000-year-old tea culture.

Most Chinese people had never tried coffee. When they did, they found it bitter and undrinkable.

But Starbucks had a plan. They weren't selling a drink. They were selling an experience.

Why did this work? China was going through economic transformation. A new middle class was emerging. Millions of families suddenly had money to spend.

They wanted to show they had made it. Western brands offered exactly that.

Starbucks understood this perfectly.

They sold coffee for 30 yuan. About $5. In a country where average monthly salary was below $100.

Being seen with a Starbucks cup meant you had made it.

But it was about more than price.

Starbucks brought a concept China didn't have. The "Third Place." A social space between home and office. Large stores. Comfortable seats. Free WiFi.

For young professionals, Starbucks became living room, office, and status symbol all at once.

The strategy worked perfectly.

2017 was the peak. Starbucks opened the Shanghai Reserve Roastery. 2,700 square meters. The world's largest Starbucks.

They controlled over 40% of China's coffee shop market. They were opening a new store every 15 hours.

They were unbeatable. Or were they?

2018: The Attack Begins

A small café opened in Beijing in 2018. Luckin Coffee. No cozy corners. No ambiance. Just a counter, 1-2 baristas, and a QR code on the wall.

The founder wasn’t from the food industry. She came from tech.

Specifically: UCar. China's answer to Uber. She'd seen how apps could flip entire industries. She saw an opportunity.

Starbucks charged 30 yuan for a latte that cost 8 yuan to make. What if you offered the same coffee for 15 yuan and still made money?

Luckin did everything differently.

They didn't see themselves as a coffee chain. They saw themselves as a tech company selling coffee.

You couldn't pay with cash. You couldn't order at the counter. Everything went through the app. Only through the app.

This wasn't a gimmick. It was strategy.

Every order gave Luckin data. Customer preferences. Peak times. Purchase patterns. They saw exactly what worked. They could predict demand. Adjust prices dynamically. Make personalized offers.

And it was fast. Open app, order, wait 3 minutes, pick up. No lines. No small talk.

Young Chinese grew up with WeChat Pay and Alipay. For them, this felt like the future.

Starbucks suddenly seemed outdated.

But here's what really changed the game.

Based on millions of orders, Luckin developed new drinks specifically for Chinese taste. Not Western coffee adapted for China. Original Chinese coffee products.

Luckin understood local needs better. They moved faster.

And the expansion was brutal.

From January 2018 to March 2019, Luckin opened 5.2 stores per day. Within 18 months, they had more locations than Starbucks in all of China.

Classic disruptor story. They didn't try to beat Starbucks at their own game. They invented a completely new game.

Starbucks lost market share month after month. Especially young customers switched to Luckin.

The Impossible Dilemma

What could Starbucks do?

Option 1: Lower prices.

That would destroy the premium brand. Starbucks had spent 18 years teaching Chinese customers that coffee is an experience. That 30 yuan is justified.

Suddenly saying "actually, not really" would undermine everything.

Option 2: Stick with premium.

But what if premium suddenly becomes irrelevant? What if customers aren't willing to pay for "experience" anymore because convenience matters more?

And what if customers suddenly define premium completely differently?

Option 3: Both at once.

Keep the premium stores. But give discounts in parallel to keep price-conscious customers.

The problem: It’s confusing. Is it premium or cheap? The brand loses clarity.

There's no good way out. Classic lose-lose.

Starbucks still responded.

In 2018, they partnered with Alibaba. For delivery service, digital payment, and access to 500 million users.

A desperate attempt to buy the digital relevance they hadn't built themselves.

But it wasn't enough.

In 2023, the price war escalated. Luckin cut prices to 9.9 yuan. About $1.40 for a latte.

Mid-2025, Starbucks gave up. For the first time in 25 years in China, they introduced significant price cuts.

But this strategy backfired.

On Weibo, the hashtag "Starbucks" went viral. People mocked how desperate the brand was acting.

The discounts undermined the premium story. Starbucks was suddenly no longer a status symbol. Just another coffee chain.

The result: Within 5 years, market share fell from >40% to 14%.

In November 2025, the final step: They sold 60% of their China business to a Chinese investor.

From number one to barely relevant. In only 5 years.

The Same Story in Automotive

The parallel is striking.

In 1984, Volkswagen became one of the first Western automakers to form a joint venture in China.

Just like Starbucks, VW didn't just sell a product. They sold an image. German Engineering. Quality. Prestige.

Driving a German car was a status symbol.

For almost 40 years, VW was number one in China. The dominant foreign brand.

China became their most important market. 40% of all VWs were sold there. Profits from China financed everything else.

Then came the disruption.

The new players are called Li Auto, Xiaomi, or BYD. They come from tech.

Just like Luckin, they're redefining what matters. They say: The most important part of a car is no longer the engine or suspension. It's the software.

For young Chinese buyers, it doesn't matter how well a car handles curves. It matters how well it integrates into digital life.

They want a smartphone on wheels. With AI assistants. Seamless WeChat integration. Software updates that make the car better. Advanced driver assistance systems.

And just like Luckin, Chinese brands understand local needs better. They develop features Chinese customers actually want.

They're data-driven. They're closer to customers. They move faster.

In 2023, it happened. BYD overtook VW in China. Just like Luckin overtook Starbucks.

And German OEMs face the same dilemma.

Should they give discounts? Or stick with premium?

They’ve tried both:

• VW's China chief said in 2023: "We won't participate in the discount battle." The new goal: Remain the largest international automaker in China. Not largest. Largest international. Accepting to become a niche player.

• In 2024, Mercedes tried discounts. The EQE got 40% off. The result? In October 2024, not a single new EQE SUV was registered. The discount didn't signal "great deal." It confirmed the product wasn't as good as local competition.

Both strategies failed.

And another parallel. Like Starbucks with Alibaba, German automakers are partnering with Chinese companies.

VW formed a strategic alliance with Xpeng to buy the software they couldn't build themselves.

But it's too late. German automaker market share in China fell from 24% to 15%. In just 4 years.

My Take

The common mistake is arrogance.

Starbucks and German OEMs overestimated their own success. They underestimated local competition. They thought premium alone would be enough.

Starbucks thought the Third Place experience was unbeatable. German manufacturers thought their engineering heritage was unbeatable. What works in Germany works everywhere.

Both overlooked how quickly a local challenger can turn the tables. With 3 tools:

1. Aggressive pricing through cost advantages

2. Products matching local taste

3. Digital technology as core of the product, not as add-on

Luckin isn’t a coffee shop with an app. It’s a tech platform selling coffee.

Nio, Xiaomi and others aren't automakers with software. They're software companies building cars.

That's the fundamental difference.

And the dilemma is real. There's no good answer.

Lowering prices kills the brand. Staying premium kills relevance. Doing both doesn't work.

Starbucks today stands at 14%. They've sold most of their China business.

German automakers stand at 15%. They're desperately investing in local partnerships. Trying to save what can be saved.

But this pattern applies far beyond Germany. Any legacy manufacturer faces the same two fatal errors:

1. Believing brand heritage alone justifies higher prices when the product no longer leads.

2. Underestimating software as the foundation of the product, not just a feature.

Who would have thought software could disrupt the coffee industry? But that's exactly what happened.

Software can disrupt any industry. Including automotive.

Legacy automakers making these same mistakes will end up like Starbucks: Once dominant, now struggling to survive.

🔗 yt | bl | re | ft

That's all for today.

Feel free to reply to this email with your thoughts.

Until next week,
— Philipp

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