Why Volkswagen is losing foot in China (Part 1/3)

Volkswagen China. Picture courtesy AP Photo/dapd, Nigel Treblin, File via finacnytrh.comChinese sales of Volkswagen-branded cars slumped 31% in July.

See also:

Why Volkswagen is losing foot in China (Part 2/3)

Why Volkswagen is losing foot in China (Part 3/3)

In July the Volkswagen brand dropped 31% year-on-year in China to 152,300 sales (imports excluded), with its year-to-date total down 10% to 1.52 million units. That’s 160.000 less new Volkswagen on Chinese roads after 7 months than in 2014. The German manufacturer’s star models are all falling sharply in July: the Tiguan (-9%), Golf (-11%), Lavida (-16%), Sagitar (-36%), Bora (-40%), Santana (-42% despite the arrival of the Gran Santana hatch), Jetta (-43%), Magotan (-44%), Passat (-49%) and Polo (-50%). Never in the 30 years presence of the brand in China had it displayed such a precarious year-on-year evolution. Why has Volkswagen come to lose its foot in China? Is this the end of the manufacturer’s implacable domination in the country? What solutions have been put in place to ensure prompt and healthy recovery? We give a few pointers to better understand Volkswagen’s current predicament in China. While Audi (-6%) and Skoda (-27%) are also in difficulty this month, we will focus this Strategy Analysis on the Volkswagen brand, not the Volkswagen Group at large.

VW Tiguan China July 2015. Picture courtesy auto163.comThe Tiguan is still Volkswagen’s cheapest SUV.

1. No affordable SUV

It is Volkswagen’s over-reliance on its sedan range that is penalising it in China. It’s no secret that the SUV segment is currently red-hot in this market and has been so for at least 18 months. In July, sales in this segment were up 41% in a market otherwise down 7%. Most manufacturers, including foreign ones, have scrambled to extend their SUV offer to benefit from the newfound craze of Chinese consumers for this type of vehicles. Not Volkswagen, who has been offering the Tiguan and Touareg for years here. Hyundai with the ix25 and Kia with the KX3 have devised China-only (at first) affordable SUV options, while Honda with its HR-V has split the booty into with the XR-V and Vezel, one for each of their Chinese joint-venture. So Volkswagen is among the few foreign manufacturers to have not reacted fast to the new SUV trend in China.

Brand SUV 2015 SUV mix SUV 2014 SUV mix
Haval 350,063 100% 235,204 100%
Honda 196,564 41% 101,018 23%
ChangAn 196,447 34% 68,907 15%
Volkswagen 149,029 10% 146,659 8%
Ford 130,307 27% 123,380 24%
Hyundai 127,622 23% 142,684 20%
JAC 126,115 69% 18,231 17%
Buick 119,571 24% 47,989 8%
Nissan 112,956 26% 106,084 20%
Beijing Auto 101,738 43% 9,368 7%
Audi 97,062 36% 109,368 33%
Chery 95,847 43% 90,318 33%
DongFeng 92,114 31% 0 0%
BYD 80,729 32% 57,327 22%
Kia 76,167 23% 79,375 20%
Peugeot 66,651 29% 56,661 23%
Zotye 64,595 61% 29,132 34%
Toyota 58,839 11% 75,597 13%
Lifan 55,947 60% 32,477 36%
Mercedes 51,283 40% 24,888 29%
GAC 50,189 67% 43,646 68%
Chevrolet 42,877 12% 37,972 8%
Brilliance 40,863 51% 17,227 18%
Geely 38,288 13% 32,766 14%
BMW 22,441 14% 25,865 14%
MG 18,078 55% 0 0%
Baojun 9,158 4% 0 0%

SUV sales and SUV ratio of locally assembled sales (SUV mix) 7 months 2015 vs. 7 months 2014

Volkswagen’s SUV mix among its locally assembled sales in China stands at 10% so far this year: the lowest of all mass manufacturers. In contrast, Honda’s SUV mix has gone from 23% to 41%, Buick’s from 8% to 24% and Mercedes’ from 29% to 40%. But the real force behind the SUV surge in China is domestic manufacturers: in the space of 18 months, they have reclaimed over half of total SUV sales in their home country. With the SUV market currently standing at 5 annual million units, we are talking about around 2 million SUV sales going to domestic manufacturers virtually overnight.

MG GS China February 2015bLaunched in February, the GS already accounts for over half of MG sales in 2015.

The year-on-year evolution of the SUV sales ratios of Chinese carmakers is telling: ChangAn goes from 15% to 34% thanks to the CS35 and CS75, JAC from 17% to 69% thanks to the Refine S3, Beijing Auto from 7% to 43% thanks to the Huansu S2/S3, Zotye from 34% to 61% thanks to the T600 – itself a copy of the VW Touareg, Lifan from 36% to 60% thanks to the X50 and X60, Dongfeng from nil to 31% thanks mainly to the AX7 and MG from nil to 55% thanks to the GS. And this is only the start: as I detailed in my coverage of Auto Shanghai 2015, each Chinese carmaker mentioned above has at least one additional SUV on the verge of hitting the market. Lifan, for example, unveiled the X40 and X70 there, in effect tripling its SUV range in less than 12 months.

Foreign carmakers Price range (yuan) Price range (US$)
VW Tiguan 199,800-315,800 31,300-49,400
Hyundai ix35 169,800-242,800 26,600-38,000
Skoda Yeti 165,800-241,800 25,900-37,800
Honda Vezel 128,800-189,800 20,100-29,700
Honda XR-V 127,800-162,800 20,000-25,500
Hyundai ix25 119,800-179,800 18,700-28,100
Kia KX3 112,800-186,800 17,600-29,200
Chinese carmakers
MG GS 119,700-179,700 18,700-28,100
Changan CS75 108,800-143,800 17,000-22,500
Haval H6 95,800-141,800 15,000-22,200
Zotye T600 79,800-115,800 12,500-18,100
Changan CS35 78,900-92,900 12,300-14,500
Baojun 560 76,800-89,800 12,000-14,000
JAC Refine S3 65,800-84,800 10,300-13,300
BAIC Huansu S3 61,800-72,800 9,700-11,400

Chinese SUVs are redefining the segment in the price department, and it’s very difficult for foreign manufacturers to really compete with these offerings, unless they create a local, low-cost brand. It’s the direction SAIC-General Motors has taken a few years back when launching the Baojun brand. Taking flight last year with the 730 MPV, Baojun launched its first SUV last month: the 560, starting at US$12,000 and attracting almost 10.000 customers straight from its first month on sale. In comparison, the VW Tiguan starts at US$31,300 and even the Skoda Yeti, Volkswagen’s (not so) low cost offering in Europe, is priced and perceived as an upmarket entry in China: it starts at US$25.900 vs. $20.000 for the Honda XR-V.

Haval H6 China June 2015. Picture courtesy auto.sohu.comHaval H6 Coupe

But the perception that Chinese carmakers are winning in the SUV segment only because of their pricing is erroneous: the best-selling Chinese SUVs in fact compete in the same price range as the cheapest foreign offerings. The Haval H6, uncontested leader of the segment for over two years, can set you back 141.800 yuan for its top-end variant, the Changan CS75 ends at 143.800 yuan and the MG GS at 179.800 yuan while the Kia KX3 – smaller, granted – starts at 112.800 yuan and the Hyundai ix25 at 119.800 yuan.

Volkswagen has missed the SUV boat by not getting a Polo-sized SUV ready for China in 2015 and with no plans to do so in the next two years. While Hyundai, Kia and most impressively Honda have all stricken when the iron is hot, and can see the future with a little more confidence. But even then, all foreigners are extravagantly priced for rural areas that are starting to fall in love with SUVs and fuelling the exponential growth that domestic carmakers are enjoying in the segment. What Volkswagen really needs in China is a low-cost SUV. It’s coming, but not before 2018: “We will bring a budget-car family to market in 2018, with an SUV, saloon and hatchback,” Martin Winterkorn told Bild am Sonntag last June. Volkswagen has been mulling a low-cost brand in China for years and already has the production capacity to churn it out. Waiting until 2018 to bring it to market is not viable in a Chinese market environment where trends make a u-turn every year.

The series continues here: Why Volkswagen is losing foot in China (Part 2/3)

This Post Has 20 Comments
  1. Looking back more than a half century, we will remember that VW came on strong in the US market with the Beetle, the minibus, and the (nicely practical) Types III and IV models. But after the demise of leaded gasoline, and the onset of pollution controls, the air-cooled engine was castrated, and VW lost control. It forfeited its leading import position to the Japanese, who were offering both the technology and designs that the US market was asking for. Seems something similar is happening these days in China. Of course the dieselgate scandal hasn’t helped any either.
    I remain baffled by why the (great) VW failed to adapt back in the 1980s.

  2. Matt, I see you mention VW South African in Part III of the article in the paragraph titled the low cost question.
    Indeed VWSA even exported South-African built Jettas and Golfs to China in the 80’s before their Chinese local manufacturing joint ventures got underway fully.

    Amid the massive decline in VW sales in China, the announcement was made of a massive boost in investment by VW Germany in the VW South African manufacturing operation going forward (albeit a small percentage in the Global scheme of things):

    Volkswagen to invest $340m in South Africa

    AUGUST 29, 2015 : AGENCY REPORT 0 COMMENTS
    print

    German multinational automotive manufacturing company, Volkswagen, is investing no less than $340m (4.5bn rand) in South Africa for new products and infrastructure.

    The automaker said it will spend about 3bn rand on production facilities at Uitenhage, near Port Elizabeth in the Eastern Cape province, and 1.5bn rand on improving the supply chain by 2017, the company said in an emailed statement during the week. VW builds the Polo subcompact at its Uitenhage plant.

    “Exports will again play a key role in our strategy going forward,” Thomas Schaefer, managing director of Volkswagen Group South Africa, said in the statement.

    Autonews reports that car manufacturers in South Africa, which also include Toyota Motor Corporation, BMW Group and Mercedes-Benz, are expected to export 18 per cent more vehicles this year as companies take advantage of a weaker rand, the National Association of Automobile Manufacturers of South Africa said this month.

    The report added that sales in the domestic market will probably fall 2.8 per cent in 2015 as consumers battle with rising fuel costs and interest rates.

    source: http://www.punchng.com/feature/auto-news/volkswagen-to-invest-340m-in-south-africa/

    ———————————————————————

    VW South Africa to invest R4,5 billion to build new models at Uitenhage factory
    RDM News Wire | 27 August, 2015 16:08

    Image by: VWSA
    Volkswagen Group South Africa (VWSA) said on Thursday it would invest more than of R4.5-billion for new models to be produced at its Uitenhage factory by 2017.

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    At a media briefing in Sandton‚ VWSA MD Thomas Schaefer announced the next phase of major new investments in the Uitenhage factory‚ its supplier base and the training of employees for the next generation of products to be manufactured in South Africa.

    The estimated R4.5-billion investment includes more than R3-billion in production facilities and quality‚ about R1.5-billion in local supplier capacity and a further estimated R22-million for the development and training of employees.

    “This will be the first time that a version of the Modular Transverse Matrix platform will be utilised in South Africa featuring the latest technologies and driver assistance systems. This will be built for both the local and export markets‚” VVWSA said.

    Schaefer also used the opportunity to update the media on various aspects of the motor industry and VWSA’s performance in the local market.

    “South Africa is not a logical production location for the motor industry as only 0.6% of the world’s vehicle production is situated here‚” said Schaefer.

    “However due to the strategic location and the potential of Africa as a future market for exports‚ as well as the security that the APDP (Automotive Production and Development Programme) provides for investors‚ ongoing investments in our vehicle manufacturing base makes sense. Hence the decision by our parent company to allow us to embark on such a major new investment.

    “Exports will again play a key role in our strategy going forward.

    “We are very grateful to the board in Germany for this vote of confidence in our country‚ management and employees and we will ensure that we deliver on our commitments.”

    Between 2007 and 2014 VWSA invested about R5.9-billion in South Africa; this was for the current generation Polo and Polo Vivo as well as plant and infrastructure.

    The Polo is also produced for exports and about 66‚000 4-door Polo’s are expected to be exported to mostly right hand drive markets in 2015‚ a 21% increase over 2014.

    The Polo Vivo and Polo have been the number one and two sellers respectively in the local market since they both were launched in early 2010.

    The current localisation level is about 72% and the new models are expected to have an even higher level of local content.

    VWSA had dominated the passenger market for the last five years and continued to do so in 2015 with a year-to-date market share of 21.4%‚ VWSA said.

    “Ongoing investment in new technologies and products will ensure that Volkswagen is positioned to continue to be the dominant player in the South African passenger market‚” said Schaefer.

    source: http://www.timeslive.co.za/local/2015/08/27/VW-South-Africa-to-invest-R45-billion-to-build-new-models-at-Uitenhage-factory

    ———————————————————

    Volkswagen to Invest $340 Million in South African Car Business
    Christopher Spillane
    August 27, 2015 — 12:43 PM SAST
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    Volkswagen plant in Uitenhage, South Africa.
    Volkswagen plant in Uitenhage, South Africa. Photographer: Henner Frankenfeld/Bloomberg

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    Volkswagen AG, which is seeking to become the world’s largest automaker by 2018, is investing more than 4.5 billion rand ($340 million) in South Africa for new products and infrastructure.
    The German manufacturer will spend about 3 billion rand on production facilities at Uitenhage, near Port Elizabeth in the Eastern Cape province, and 1.5 billion rand on improving the supply chain by 2017, the Wolfsburg-based company said in an e-mailed statement on Thursday.
    “Exports will again play a key role in our strategy going forward,” Thomas Schaefer, managing director of Volkswagen Group South Africa, said in the statement.
    Car manufacturers in South Africa, which also include Toyota Motor Corp., BMW AG and Mercedes-Benz AG, are expected to export 18 percent more vehicles this year as companies take advantage of a weaker rand, the National Association of Automobile Manufacturers of South Africa said this month. Sales in the domestic market will probably fall 2.8 percent in 2015 as consumers battle with rising fuel costs and interest rates, the industry body said.

    source: http://www.bloomberg.com/news/articles/2015-08-27/volkswagen-to-invest-340-million-in-south-african-car-business

    ————————————————————-

    Volkswagen: VW baut Geschäft in Südafrika aus
    WirtschaftsWoche-27 Aug 2015
    Der deutsche Autobauer Volkswagen investiert hunderte Millionen in sein Werk im südafrikanischen Uitenhage. Schon jetzt gehört VW zu den …

    Volkswagen rüstet auf: Werkausbau in Südafrika geplant
    Handelsblatt-27 Aug 2015
    Explore in depth (5 more articles)

    ——————————————————————

    Volkswagen invertirá 304 millones en su planta de Uitenhage …
    Te Interesa-28 Aug 2015
    El consorcio automovilístico alemán Volkswagen tiene previsto invertir … de Uitenhage (Sudáfrica) y en reforzar su base de proveedores.

  3. in 2014,events exposed in china,show very poor quality of vw vehicles(Sagitar, EA888 engine and DSG transmission…), which shocked chinese consumers

  4. Matt Gasnier :
    Thank you Bryan – glad you liked it.
    Just keep in mind these very harsh year-on-year evolutions are, for most manufacturers you mentioned, only for July. So we can’t draw conclusions based on one month only. Volkswagen has been struggling for a little longer which warranted a full analysis. Chinese consumers are switching to domestic brands in the SUV segment for the most part, but the market share of domestic brands had reached very low levels in the past couple of years, so this is a readjustment – albeit very bad news for foreign manufacturers.

    The question is: Are chinese consumers switching to domestic cars or are they switching to cheaper cars?

  5. @Matt Gasnier
    I guess one could then suggest that foreign car-makers have been profiteering in China while they could , but now the gravy train is coming in to the station and the ride is soon to be over? On the other hand they do have established manufacturing in China which will allow them to compete on the coming equal terms with Chinese makers? I look forward to your sedans article.

  6. A question. Are Chinese brands generally cheaper (disregarding ancient models like the Geely CK in its latest form that’s still out there). Is a Haval cheaper than say the Tiguan at the same market level for example, or Chana, JMC etc, but (and here’s the but) are Chinese consumers status conscious and will so far pay a premium for a foreign brand name?

    Are we seeing the beginnings of a slowdown that is forcing Chinese buyers to think more about price, just at a time when the domestic makers are getting their act together? Is the emerging economic slowdown a potential boon for (some of) the domestics at the expense of foreign brand names?

    1. Hi Paul – fair question. The answers are pretty simple in my view:

      1. At the same market level, a Chinese brand is a lot cheaper than a foreign brand. So to follow your example, the Haval H6 is a lot cheaper than the VW Tiguan at similar size/options/techs for example.
      2. This is the parallel to a situation where Chinese manufacturers are status conscious and until now considered Chinese cars to be inferior to foreign-branded cars by a large margin, and therefore were happy to pay a (very high) premium for it. A very logical situation as it reflected the truth out there in the market that Chinese vehicles were not at the level of foreign ones.
      3. As the quality of Chinese cars is improving at lightning speed (see my coverage of the latest Shanghai Auto Show) in tandem with prices going further down due to better production efficiencies, Chinese consumers are becoming less inclined to pay a premium for foreign carmakers. I see the price difference between Chinese and foreign carmakers inexorably thinning. It won’t be zero but the premium will be much less than it used to be.
      4. The slowdown is only having a superficial effect on Chinese buyers being price-conscious. What is happening is it is becoming easier for a Chinese buyer to purchase a vastly improved Geely EC7 for half the price as a VW Jetta, because these buyers (rightly) consider that the Jetta is just simply not worth double anymore. It used to be, but with Geely’s gigantic quality improvement, the Jetta is now looking like very average value for money. That’s just one example but it’s happening across the board. I’ll touch on it a lot more in Part 2.

      Does this help explain?
      All the best,
      Matt

  7. @Bryan
    Probably a combination of different reasons. Skoda for example has only one SUV, VW also. I do not think consumers buy especially nationalistic, but at the moment they seem to be orientated more to cheaper cars. And they get aware, that chinese carmakers are progressing more and more and cost just half of the price of VW or Ford.

    GM is giving the right answer with Baojun and is losing less – Ford, Skoda or VW don’t have a budget-brand. This theme might be very important during the next years.

    Interesting points for parts 2 and 3. 😉

  8. Very good article Matt.

    It’s interesting that all the non-premium Americans and Europeans brands lose a lot of market share, VW (-31%), Ford (-19%), Chevrolet (-44%), Peugeot (-27%), Skoda (-27%), etc..

    Does this mean that the Chinese consumers are becoming more and more nationalistic? This is very interesting!

    1. Thank you Bryan – glad you liked it.
      Just keep in mind these very harsh year-on-year evolutions are, for most manufacturers you mentioned, only for July. So we can’t draw conclusions based on one month only. Volkswagen has been struggling for a little longer which warranted a full analysis. Chinese consumers are switching to domestic brands in the SUV segment for the most part, but the market share of domestic brands had reached very low levels in the past couple of years, so this is a readjustment – albeit very bad news for foreign manufacturers.

  9. Very well written and insightful article, Matt. 🙂
    It seems that Volkswagen Group has more and more “Baustellen” (Construction Sites)as the Germans would say. There is the loss of Market Share in Brazil, the barely hanging on in the US. An impressive Non-Presence in Asia and now not only dropping sales but sinking market share in China. I say VW Group because it appears that Audi is starting to have similar problems there.
    IMHO other than belting out great proclamations about wanting to be the biggest, which is not in my Interest as a consumer, VW Management has not shown a lucky hand in addressing their issues, most certainly not in a timely manner. As an example, despite the fact that VW has been in the LCV business for decades, neither in China, nor the US have they been able to introduce these offerings and take advantage.

  10. Looking forward to parts 2 and 3. 😉

    Interesting question: What is VW doing in the low-cost-segment? GM has Baojun, VW has nothing. Budget-VWs will be arriving in 2018 – very late. And this will just be the first model. Baojun has a proper mode-family already now.

    The problem SUV will be solved in 2017/18, but the problem budget-car takes even more time.

    Of course the question is important, where will chinese automakers be in 2018.

    1. Thanks Steam – Yes I saw this and I mentioned it but it will be detailed a lot more in Part 3 of this analysis.
      All the best,
      Matt

  11. Agreed Pat!!

    Very good analysis, Matt. Chinese manufacturers have really quickly adapted to SUV trend. The other foreign brand that is suffering is Chevrolet, part of GM! On the other hand, GM was very smart with Baojun!

    It is now clear that the leadership crisis at VW earlier in the year was really about China. The leadership of VW missed the trend and VW will be paying the price!

    It will be interesting to follow sales data in the next couple of months!

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