By Rachel More
BERLIN, Jan 28(Reuters) - Volkswagen CEO Oliver Blume faces a defining test this year, investors say: to prove he can stem a slide in China and close a tech gap to rivals, regarded as the essential elements for a successful turnaround of the German automaker.
Forced to end his dual-role as boss of both Volkswagen and Porsche from January following the sports car division's slide into crisis, Blume got a vote of confidence in the form of a five-year extension to his group CEO contract.
But without Porsche as a distraction, investors burned by the companies' combined 48-billion-euro ($56-billion) loss in value on his watch expect results - and their patience is wearing thin.
Reuters spoke to six investors, from smaller shareholders to top-10 funds, who all said Blume is under pressure to show his strategy to revive the fortunes of the world's No. 2 carmaker is working.
The three-decade Volkswagen veteran outlined the challenge at the Munich car show in September.
"The party we have been celebrating in the automotive industry for decades is over in its current form," Blume said. "Now it is about reorientation."
Blume declined a Reuters interview request for this story.
In the world's largest car market, which Volkswagen once dominated, Blume is betting on an "in China for China" strategy, teaming up with local players to revive sales. At the same time, he is staking the company's future software platform for Western markets on a high-risk joint venture with loss-making California EV manufacturer Rivian.
Better-than-expected 2025 cash flow reported last week is fuelling hopes the 57-year-old's efforts are on-target.
But his margin for error is shrinking, said Marc Liebscher of SdK, an association with 9,000 members representing smaller Volkswagen shareholders.
"The pressure on him is vast," he told Reuters. "Blume is now forced to justify his early praise in a very difficult market environment."
CHINA: FROM CASH COW TO PROBLEM MARKET
Investors say Blume must urgently win back China, where Volkswagen made billions during its years as the market leader.
It was overtaken by BYD in 2024, slipping to third place behind another local rival Geely last year. Its Porsche and Audi brands have also struggled.
The roots of the decline pre-date his tenure as CEO, and some investors credit Blume, who earned his engineering doctorate in Shanghai, with finally addressing the slump.
"What he has done so far is promising," said Moritz Kronenberg of Union Investment, a top-20 Volkswagen investor.
The company has shifted key technology and vehicle development to China, a move it says is speeding up development and providing Chinese consumers with a product tailored to their tastes.
Blume is looking at selling more Chinese-made cars abroad, though Europe, its largest market, remains off the table for now.
Expanding imports of Chinese-made cars or parts would require signoff from powerful German labour representatives, one company source told Reuters.
Having agreed painful concessions less than two years ago allowing Blume to cut 35,000 jobs in Germany, the works council would likely resist.
While Blume may have shown he has a handle on what is wrong with the China business, potential roadblocks like that worry some investors.
"It's still problem assessment rather than solution-driven," said Hendrik Schmidt of top-10 Volkswagen investor DWS.
BLUME'S $5-BILLION SOFTWARE BET FOR THE WEST
For some, Volkswagen's China woes simply underline that the company - for nearly a century a global champion in automotive engineering - is falling behind in an era where software is king.
"Soon it will be 20 years since the advent of the iPhone," SdK's Liebscher said. "It is appalling, even shocking, that Volkswagen is unable to develop a software solution itself."
Years of problems at in-house software unit Cariad prompted Blume to bring in external help, betting $5 billion on a joint venture with startup Rivian.
They are collaborating to develop a new electronics platform meant to undergird future advanced models sold in Volkswagen's traditional Western markets.
This year could prove decisive.
Winter testing on the new system is currently under way in Sweden, with Volkswagen's next $1-billion investment tranche hanging in the balance.
"This is mission-critical for success in the Western car market," said Kronenberg, calling the partnership the "most fragile aspect" of Blume's strategy.
When asked about Rivian, Volkswagen said the development "of a state-of-the-art zonal architecture for our future software-defined vehicles" was progressing well.
Software is a highly sensitive topic at Volkswagen.
Delays at Cariad preceded the 2022 ouster of former CEO Herbert Diess, which sources at the time said was led by the Porsche and Piech families, who control over half the voting rights in Volkswagen.
Having taken a major hit from the losses at Volkswagen and Porsche, they are now keeping a closer eye on the turnaround plan, according to a source familiar with the families' thinking.
A spokesperson for Porsche SE - Volkswagen's majority Porsche-Piech-owned top shareholder - said Blume had demonstrated his ability to develop the carmaker during a challenging period for the industry.
"Now it is important to continue working consistently on implementation," the spokesperson said.
While Blume's contract extension was seen as demonstrating the families' backing, a contract is no guarantee, as Diess learned when he was pushed out mid‑term.
DWS's Schmidt said Blume has the "necessary skill set" to manage relations with the families.
"But that does not relieve him from the duty of delivery."
($1 = 0.8524 euros)
(Additional reporting by Christina Amann; Editing by Joe Bavier)
