Volkswagen AG CEO Herbert Diess said the traditional way of introducing car technology from Europe to China is no longer working in the age of software-defined vehicles.

In a Sina Weibo post last week, he said Volkswagen needs to catch up with the Chinese carmakers who are "really fast" in the areas of onboard experience and driving-assist.

"The user experience in the car is really different and complicated in China: You need karaoke, sophisticated loudspeakers, cameras to take pictures and for streaming," he said.

"The other thing is driving-assist toward autonomous driving, and some of Chinese competitors are moving very fast," Diess added.

Volkswagen, the best-selling international carmaker in China, established the first subsidiary of its software company Cariad earlier this year in the country to better respond to the latest demands of tech-savvy Chinese carmakers.

"We are going to have software kits in China for China," said Diess. "I am convinced that we are going to be really, really fast because China is so fast."

Edward Wang, managing director of syndicated research at J.D. Power China, said smart features and exciting onboard experiences are becoming increasingly important factors when car buyers make decisions.

"They are not necessarily buying a model solely because of these functions. But they certainly would not buy it if it doesn't have such functions," said Wang.

He said Chinese brands are expected to lead in this age of smart and software-based vehicles because they have a better understanding of what local customers want and are quicker to adopt new technologies and launch new models.

"Such innovation is injecting momentum into Chinese brands in a rapid, effective and continuous way," said Wang.

J.D. Power China's findings released in May showed that 53 percent of the respondents said they would choose Chinese marques, and 67 percent of those who currently drive Chinese vehicles said they would choose Chinese brands again.

This is most likely why international brands are speeding up their efforts to localize their research and development in China.

Chang Qing, CEO of Cariad China, said in April there were more than 600 software engineers in China and the figure is expected to double by the end of 2023, with more than 90 percent of them being Chinese.

"The newly established China team will enable us to quickly respond to local needs. We will develop, update and continuously improve our products at China-speed based on local customer expectations," said Chang.

The role of the engineers will be to develop and adapt software for Volkswagen's marques including Audi and Porsche.

Among other things, it will enable the first over-the-air update of Volkswagen's electric ID. family in China in the second half of this year.

Cariad China is also building a nationwide research and development network, with Beijing, Shanghai, Chengdu in Southwest China's Sichuan province and Hefei in East China's Anhui province earmarked as initial hub locations.

Volkswagen is not alone. Tesla CEO Elon Musk said in May that he expects some "very strong companies" to emerge from China and provide stiff competition to the company in the electric vehicle sector in the years ahead.

Tesla has set up a research and development facility in Shanghai, the company's first outside the United States.

The goal of Tesla's team in China is to design, develop and produce new vehicle models and products with Chinese elements and sell them globally, according to Tesla in an earlier recruitment post.