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