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

Volkswagen China. Picture courtesy ibtimes.comMore stormy weather ahead for the Volkswagen brand in China?

This third section concludes our Strategy coverage of Volkswagen’s current woes in China. In Part 1 we studied how the lack of affordable SUV lineup was penalising the German carmaker, and in Part 2 we analysed how its over-reliance on sedans and a potential slip up in quality as well as market forces moving away from the brand both at the lower-end with first time buyers and the higher-end with replacement buyers was hurting Volkswagen. Now that the scene is set, what next? What plans has Volkswagen put in place to ensure prompt and healthy recovery from a year-on-year evolution that has never been so precarious?

See also:

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

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

3. What next

Firstly it is adequate to put the last couple of months into perspective, which is three full decades of ultra-domination of the Volkswagen brand in Chinese sales charts. Then, let’s go through Volkswagen’s plans for the next few years, some of them potentially offering a solution to the SUV and sedan predicaments the brand is currently finding itself in in China.

2012 VW Santana China September 2012Volkswagen has been dominating the Chinese car market since 1984 and the Santana.

Readjustment

Official CAAM sales data, covering locally-assembled vehicles only, shows a 31% year-on-year decline for the Volkswagen brand in July in China at 152.300 sales vs. 219.203 a year ago and a 33% decline of its sedan sales at 133.176 units vs. 197.332. Five of its star nameplates have plunged by more than 40% year-on-year: the Santana, Jetta, Magotan, Passat and Polo. Volkswagen head offices have remained very discreet about the brand’s Chinese July results, preferring to compile year-to-date figures instead. In their worldwide July sales report they state China sales are down 8% so far in 2015 at 1.48 million, which for once doesn’t add up with 2014 figures released by CAAM: Volkswagen implies 210.000 units in July 2014 including imports whereas CAAM says 219.203 excluding imports, and 180.000 units in July 2015 incl. imports. Even if VW imports are stable year-on-year at 28.000 units, the overall July decline would be 28% instead of the 14% implied by VW.

Volkswagen China. Picture courtesy scmp.comVolkswagen may need to fast-track its launch plans for China to return to growth.

These are all frightening figures regardless, but in actual fact part of a logical readjustment. Since its introduction in the country in 1984, Volkswagen was frequently selling more than double the monthly volume of any other brand in China. In July 2014 for example, below VW and its 219.203 sales was Toyota at 81.714 units. This July, Toyota is at 96.359 vs. 152.300 for Volkswagen, arguably a more ‘natural’ gap. In the face of increased competition, a smoothing out of sales differences atop the brands ranking is to be expected and reflects a natural evolution towards more fragmentation, a characteristic of maturing markets.

What is certain is the thawing of Volkswagen’s market share in China – as natural as it can be – has a devastating effect on the Volkswagen AG Group worldwide results. Last week VAG announced its second-quarter profit fell 16% due in large part to weakness in China, the #1 new vehicle market in the world. In my Strategy feature “Where is China headed?”, written 3 months ago, I mention that a record 75 new nameplates have kick-started local production in the past 12 months (only one VW: the Lamando) and new factories are still opening on a monthly basis. This combined with a more shaky growth environment gives the perfect recipe for “blood” and aggressive price wars. We are seeing the start of this bloodbath before our eyes with Volkswagen potentially starting to lose foot in China.

VW Taigun. Picture courtesy betterparts.orgThe Taigun: what Volkswagen really needs for China?

SUV plans

Part 1 of this Strategy series showed in detail how Volkswagen had missed the SUV boat in the past 12 months by keeping its lineup to a lonely and extravagantly expensive two models: the $31.300 Tiguan and imported Touareg. The Volkswagen Group recently unveiled outlandish SUV plans for the next few years, namely 25 new SUV models by 2020. Among them, nine will be VW-branded but surprisingly, these worldwide launch plans seem to ignore China’s pressing needs altogether as far as the Volkswagen brand is concerned (see below).

Volkswagen AG SUV launch plans until 2020:

Model Launch Would help VW in China?
New VW Tiguan 2015 A little
Bentley Bentayga 2015 No
Audi TT Offroad 2016 No
New Porsche Cayenne 2016 No
Seat Compact SUV 2016 No
Skoda Montania 7-seater 2016 No
VW Tiguan XL 2016 A little
VW Cross Blue 2016 A little
New Audi Q5 2017 No
Audi Q8 2017 No
New Skoda Yeti 2017 No – could hurt VW
VW Golf SUV 2017 Yes
VW Cross Coupé 2017 A little/Yes
New VW Touareg 2017 A little
Audi Q1 2018 No – could hurt VW
New Audi Q3 2018 No – could hurt VW
Seat City SUV 2018 No – could hurt VW
VW Polo SUV 2018 Yes
VW Tiguan CC 2018 A little
VW Golf SUV Convertible 2018 No
Porsche Cayenne Coupe 2018 No
Audi Q1 Convertible 2019 No
Skoda Superb X 2019 No
Lamborghini Urus 2019 No
Seat 20V20 2020 No
VW Taigun TBC Yes

VW Golf SUV. Picure courtesy autozeitung.deNot before 2017: the VW Golf SUV.

Last January, President and CEO of VW Group of America Michael Horn told Auto Express UK: “Car companies are producing SUVs like crazy at the moment. We have to get the next Tiguan and mid-size SUV right, but then there is room for derivatives – whether that’s models which are priced upwards or downwards”. A glaring lack of urgency in these words, yet Chinese car buyers want small, affordable SUVs and they want them yesterday. Let’s look at the next Volkswagen-branded SUV launches in detail, assuming they will also occur in China at roughly the same times, which is no guarantee so much so these plans seem to have been drawn with only Europe and the U.S. in mind. How so very 1990.

VW Cross Coupe GTE. Picture courtesy autobild.deMake or break: the VW Cross Coupé could be a surprise blockbuster in China.

The new VW Tiguan will be unveiled at the Frankfurt Auto Show next month, along with an XL seven-seater variant scheduled to be in dealerships in mid-2016. With starting prices well above $30.000, these two models have little chance of significantly impacting VW’s fortune in China: they will mainly help prevent SUV sales from declining in a booming market. It goes the same for the VW Cross Blue (2016), totally suited to the U.S. market but not anymore to the Chinese one – although it was when it was planned – and the new Touareg (2017) – all too big to impact Chinese volume. Profits may welcome these arrivals with arms wide open though, provided they are all assembled locally. The Cross Coupé (2017) has that little bit of sexiness in its lines and size that could make it a surprise blockbuster in China: the jury is still out on this one.

VW Polo SUV Concept. Picture courtesy autoexpress.co.ukThe VW Polo SUV could reach Chinese shores by 2018 at the earliest: 3 years too late.

Not before 2017 do we finally answer the question “Will this SUV help VW in China?” we asked in the table above with a resounding “Yes”: the Golf SUV is scheduled to launch in Europe at that time, but Volkswagen would be smart to try and accelerate the process greatly for China. The year after that should arrive an even better solution for the Chinese market: the VW Polo SUV, based on the T-Roc Concept presented at the 2014 Geneva Auto Show. Keeping in mind the 2nd generation Honda HR-V, Hyundai ix25 and Kia KX3 will be well established by then… The Tiguan CC and Golf SUV Convertible also scheduled for 2018 seem superfluous, and we finish on the big question mark: the Taigun, based on the Up! minicar and unveiled as a concept at the 2012 Sao Paolo Auto Show, seems to us to be the perfect Volkswagen answer to China’s current SUV craze. Don’t keep your hopes too high though: its production is not even confirmed for now.

VW Cross BlueMore suited to the U.S. market: the 2016 VW Cross Blue.

Looking at how fast the Chinese car market evolves – writing this article even 4 months ago would have required drastic copy changes – by 2018 when Volkswagen will have a true SUV lineup, Chinese car buyers will likely have moved on from cheap SUV to something else – bigger, better, cheaper, more efficient – and Volkswagen may have missed the boat again. These launch plans truly have to change to benefit fully from what China has to offer volume-wise and to ensure Volkswagen’s numerous Chinese factories won’t idle out by then.

Renault Duster Colombia 2014. Picture courtesy renault.com.coThe Duster: Renault’s best-seller worldwide and Volkswagen’s worst nightmare.

The low-cost question

Volkswagen has been eyeing the tremendous worldwide success of Renault’s “entry range” – sometimes Dacia-branded – over the past decade and has been mulling a low-cost brand to cover all bases in China and emerging markets for a while now, proof being this December 2012 The Truth About Cars article presenting it as a fait accompli. These hesitations have cost the German manufacturer dearly now that Chinese carmakers are back on track thanks to cut-thorat pricing and easy-to-the-eye urban crossovers. As we have described in Part 2 of this series, even the low-end VW Santana and Jetta don’t look like so much of a bargain anymore in the face of tremendous recent quality improvements of domestic brands such as Geely. It has never been Skoda’s role to attract the Chinese first time car buyer as the Czech brand is strangely positioned much higher in China than it is in Europe, and Volkswagen benefits from such wide appeal and recognition here that launching an entirely new brand in this market seems like an insurmountable task, let alone a foolish one – also the reason why Renault will not launch Dacia in China.

VW Polo Vivo South Africa 2014. Picture courtesy of claremont.co.zaLow-cost inspiration? The South African VW Polo Vivo.

Last June, CEO Martin Winterkorn told Bild am Sonntag a budget-car “family” is coming, with an SUV, saloon and hatchback, but not before 2018. Note the use of the word family and not brand anymore. Volkswagen already has enough factories spread across the country to churn out this family of budget-cars fast. The recent market slowdown could be used to free significant chunks of production and allow the insertion of these new models. But successfully branding, positioning and selling low-cost vehicles is a skill only Renault has managed to master so far, and it took the best part of a decade. You could argue Volkswagen has already been doing low-cost for a while in Brazil with the Gol and in South Africa with the Citi Golf and the Polo Vivo. But China is a different beast that evolves at lightning speed, in comparison Brazil and South Africa are frozen in time.

Baojun 560 China July 2015bA low-cost VW Tiguan? General Motors’ Baojun 560.

General Motors understood this half a decade ago when creating the Baojun brand in collaboration with SAIC. The result: 300.000 units of the 730 MPV are now on Chinese roads less than a year after launching, and it took roughly a month to get 10.000 buyers for the all-new 560 SUV. Sales figures that are keeping Volkswagen’s Chinese head office awake at night. The cherry on the cake: the incredible success of the Baojun brand over the past 12 months is an absolute slap in the face of Volkswagen’s hesitation at launching a similar offer in China: all Baojun models inspire themselves greatly from Volkswagen’s design, in the end looking suspiciously similar to what a low-cost VW Touran and Tiguan could have been…

With all of this taken into account, Volkswagen’s return to Chinese growth could come down to four elements:

1. Make drastic quality improvements and price cuts to the Jetta and Santana.

2. Fast-tracking the launch of the much awaited Chinese budget-car family.

3. Advancing the Chinese launch of both the Polo and Golf SUV and potentially Cross Coupé SUV.

4. Green-lighting the Taigun mini SUV for China-only as a test.

BSCB readers: now it’s your turn to give your opinion. What do you think is the key to Volkswagen’s return to growth in China in the long term? Tell us in the comments section of this article.

See the previous parts of this VW in China series here:

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

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

This Post Has 16 Comments
  1. Hi Matt,

    did you notice the articles about Volkswagen Group overtaking Toyota Group in worldwide sales 2016?

    This is an example: http://www.japantimes.co.jp/news/2016/12/27/business/corporate-business/toyota-likely-fall-top-spot-global-auto-sales/#.WGQdc7k7Rzl

    We discuss about this in the german forum “Motor-Talk” since 1sr of december:
    http://www.motor-talk.de/forum/vw-konzern-sagt-toyota-kampf-an-bis-2018-weltweit-die-nr-1-t1558449.html?highlight=uups&page=10462#post48792036

    Also interesting: Volkswagen Group is going to overtake General Motors in China in 2016. Although they do not have enough SUV’s – a decent surprise to me.

    You find data and sources here:
    http://www.motor-talk.de/forum/vw-konzern-sagt-toyota-kampf-an-bis-2018-weltweit-die-nr-1-t1558449.html?highlight&page=10495#post48999099

  2. nice write up Matt. Your reports are always informative and interesting.
    I can’t help thinking that the VW long term strategy and product-planners were counting on some help from Suzuki in their small car offerings. This was a potentially good collaboration that was hindered by top level egos and just officially ended acrimoniously. VW could have stuck their badge (and maybe their 1L gas engine) on the many Suzuki kei car offerings and SX4 for China by now as a short term gap filler.
    Also, as you mentioned, the perfect storm of
    1) customers moving from sedans to SUV’s
    2) shrinking middle market (east coast VW owners wanting to move up to BMW, MB etc) (hinterland new car buyers having much more viable local offerings)
    3) overall economic distress
    4) VW recalls and quality issues
    all results in VW sales and more importantly, profits drop.
    Reminds me of GM’s decline in the US market albeit at a much faster rate.

    What would I do if I was VW CEO?
    Focus on profits and company sustainability rather than that the stated goal of being the world’s biggest car maker.

  3. Paul :
    VW have been showing SUV concepts regularly, they just haven’t been building them. They have however wasted resources on dogs like the America-only Passat.

    The US-Passat was okay, but VW should have indroduced affordable SUVs afterwards. But instead they focused on diesel-engines, Golf Station Wagon – this is all stuff customers buy in europe, but not in the USA. So basically the story is about offeringt the cars desired by the clients – same problem as in China.

    It is very interesting to compare the performance of US-VW with Subaru because in 2012 VW was still ahead of Subaru. Now Subaru is selling 60 % more than VW. The reason? SUVs. 😉

  4. Hi Matt, there were some photos in the wrong places and photos from other articles in the China Part III article yesterday, but all was fixed this morning – may have been a problem on your webserver locally or at your service provider.

    1. Hi Anton – could you email us some screen grabs? It looks fine our end so need to know what browser you are using too, as it may impact it?
      Many thanks,
      All the best,
      Matt

  5. VW have been showing SUV concepts regularly, they just haven’t been building them. They have however wasted resources on dogs like the America-only Passat.

  6. @steam
    “”Probably we will read this contents in other websites in a few months, but my impression is that you are ahead of most writers.””

    This is the reason why I read and like this blog!

    “”Volkswagen head offices have remained very discreet about the brand’s Chinese July results, preferring to compile year-to-date figures instead.””

    The best way you can see that VW is in trouble! Which auto company would like to post: Our July sales in China down 31%!

  7. I do not see solutions for 2015 and 2016. The SUV-question may be answered in 2017/18. But still the budget-car-question remains. So times might get harder for VW in China until they answer to market’s requests.

    Thanks Matt for parts 2 and 3, very interesting analysis. Probably we will read this contents in other websites in a few months, but my impression is that you are ahead of most writers.

  8. What is the future for VW in China?? The same as GM in the US. From 50+% market share to 17% market share. There is no way VW can defend its market share. It was just to nice to last!

    For 2016 I predict a recesion in China and the closure of some factories and local brands. Stay tuned 🙂

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