Volkswagen has problems around the world, spurring it to announce on Thursday that it would slash the number of models it offers by as much as half, but many of its troubles can be traced to China.

The German auto giant, the world’s second-largest carmaker after Toyota, led the pack in China, the world’s largest car market, for four decades. For many years, the company’s joint ventures and factories in China provided half or more of the company’s worldwide profits, which helped Volkswagen afford high salaries and generous benefits for its vast work force back in Germany.

But Volkswagen’s sales in China last year were down by a third compared with 2019, as the company lagged Chinese competitors in the switch to electric cars. And the company’s performance keeps getting worse: Sales in China from April through June were down by another third from just last year, a weak performance even by the standards of China’s slowing economy and shrinking car market.

Volkswagen now faces daunting competition from Chinese rivals in markets outside China, too. Chinese cars are pouring into Latin America and Africa, where Volkswagen has long been among the market leaders. And in the European Union, VW’s home turf, Chinese automakers passed Japanese automakers in terms of market share in May. The rapid expansion by low-priced Chinese entrants in Europe is putting heavy pressure on Volkswagen and other European manufacturers to cut prices, shrinking their profit margins.

Volkswagen did not provide details on Thursday about how it might slim down its operations in line with a more limited model lineup. The company said it would aim to produce nine million vehicles a year, compared with a goal of 12 million before the Covid-19 pandemic and 10 million more recently. German press reports had suggested that Volkswagen was preparing to lay off as many as 100,000 workers by the end of the decade and close four factories in Europe.

Volkswagen’s China-related troubles can be traced in part to decisions the company made going back many years. The company’s leaders in Europe were skeptical nearly two decades ago as China’s leaders pushed the country’s auto industry to shift toward electric cars.

Like other multinationals, Volkswagen was reluctant to start designing a range of electric cars from scratch until the Chinese public showed a clear preference for such models. By contrast, Chinese automakers generally believed Beijing’s intentions and planned accordingly.

State-controlled banks also issued huge loans to Chinese automakers at low interest rates, while local governments provided financial backing that helped the firms make interest payments and propped them up if they ran into financial trouble.

This year, Volkswagen introduced the first of many models it has developed in China to be fully electric and have extensive internet connectivity, the ID. Unyx 07. Its comprehensive electronic architecture, according to Volkswagen and analysts, translates into considerable cost savings.

“Over the past three years we have completely renewed our product portfolio,” said Ralf Brandstätter, the chairman and chief executive of Volkswagen Group China, in an email reply to questions. “This year, we are launching our largest product offensive ever, with 20 smart and electrified models coming to market.”

But Volkswagen’s new models in China are arriving late. In 2024 and 2025, China offered extensive subsidies for households to trade in gasoline-powered cars for electric alternatives. As a result, many Chinese households that want electric cars now already have them.

To make matters worse, Beijing made those electric-vehicle subsidies much less generous at the start of this year, after they became a budgetary burden. Industrywide sales of battery-electric and plug-in hybrid cars in China fell 14 percent in the first half of this year from the same period last year.

“Foreign automakers in China have missed the boat on electric vehicles,” said Stephen Dyer, the head of the Asia automotive and industrial division at AlixPartners, a global consulting firm.

Volkswagen had initially tried to modify a few existing gasoline-powered designs for electric versions. That left the company underprepared when Tesla ramped up production and sales in China in 2020, generating a rapid and almost nationwide embrace of electric cars.

A clear pattern has emerged since then. A few automakers, like Tesla and Xiaomi, sell only electric cars. BYD, the Chinese company that vies with Tesla for the top spot in global electric vehicle sales, also sells hybrid cars with large batteries and small gasoline engines. Some Chinese automakers that previously made mostly gasoline-powered models have shifted half or more of their sales to electric cars, notably Geely, which now rivals BYD for market leadership in China. Multinationals like Volkswagen, General Motors and Ford Motor continue to offer mainly gasoline-powered cars.

But sales of gasoline-powered cars in China have plummeted this year almost twice as fast as the decline in deliveries of battery-electric cars and plug-in hybrid gasoline-electric cars.

Volkswagen’s share of China’s gasoline-powered car market has increased slightly. But with more than three out of five new cars in China now fully electric or plug-in hybrids, its strength in this fast-shrinking segment has not prevented the company from losing sales overall.

“Volkswagen’s difficulties in China primarily stem from its own slow transformation,” said Cui Dongshu, the secretary general of the China Passenger Car Association, a trade group.

A housing market crash has made it increasingly difficult for millions of Chinese households to afford a new car, releasing excess inventory from Chinese factories for export instead. China has also kept its currency weak, allowing its automakers to undercut rivals in foreign markets.

China’s car exports zoomed to eight million last year from one million in 2020, and are on track to reach 12 million this year. For comparison, the entire European Union car market was about 11 million last year.

Aside from playing catch-up with Chinese competitors on drivetrains, Volkswagen has been slower to master vehicle software and other electronic technologies. The German company has followed European industry standards by testing self-driving features for longer than Chinese rivals before introducing them in mass-produced cars. While Volkswagen has been methodically testing, Chinese automakers have widely introduced self-driving technologies, despite occasional crashes.

Volkswagen has also been later than Chinese competitors in adopting eye-catching instrument clusters with large display screens that become extensions of the driver’s smartphone. Volkswagen’s cars have begun to seem dowdy by comparison.

In Volkswagen cars, “features like the in-car touch screen, smartphone connectivity and the electronic cockpit simply aren’t as forward-looking or as user-friendly as those offered by Chinese brands,” said David Zhang, the dean of vehicle technology research at the Jiangxi New Energy Technology Institute.

Chinese automakers have saved money by not investing as much in the costly precision steering and other driving performance features emphasized by engineers at Volkswagen and other German manufacturers. This has helped Chinese companies to offer more electronic features for cheaper prices than anything available from German automakers.

“The challenge isn’t simply to build better electric cars,” said Bill Russo, an automotive consultant in Shanghai, but to become “a different kind of company.”

Volkswagen built an immense electric car factory in 2023 in Hefei, a city in north-central China. It also constructed a 3,000-engineer design center nearby, with the goal of tailoring cars more directly to China while also adding the latest Chinese innovations to models slated for sale elsewhere.

Volkswagen has begun exporting cars from China to Central Asia and the Middle East. It has also begun looking for ways to use technologies developed by its Chinese engineers in South America and Africa.

“Volkswagen China has the potential to become both an export hub and technology supplier for the Global South,” according to Mr. Brandstätter, the company’s China chief.

Perhaps most notably, given the anxiety over job losses in Europe, Volkswagen in 2024 began shipping its Cupra Tavascan, a crossover sport utility vehicle, from China to Europe. Volkswagen said in a written reply to questions last week that it did not plan to export to Europe or the United States other models it builds in China.

The long-term dilemma for Volkswagen and other German automakers is that their complete mastery of internal combustion engine technology does not count for much in a global market that is racing toward electrification. “They’re really good at something that is going out of fashion fast,” said Michael Dunne, a longtime China automotive consultant.

Jack Ewing contributed reporting from New York. Ruoxin Zhang contributed research from Beijing.