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)

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

VW Passat China crash test. Picture courtesy auto.sina.com.cnVolkswagen suffers from an over-reliance on its sedan lineup.

See also:

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

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). In Part 1 of this Strategy series we studied the first reason behind this fall from grace: the absence in Volkswagen’s lineup of any affordable SUV, a situation that is likely to last until 2018. In Part 2 we look at the second main explanation for this precarious situation.

2. Sedans under attack

In China, the sedan segment describes all passenger cars that are not SUVs or MPVs and therefore also includes hatchbacks, although these are a lot rarer than sedans – three-box-cars – as perceived in Europe. Volkswagen has always excelled in the sedan area. Unfortunately for the German manufacturer, sedans are currently under attack in China and are solely responsible for the unusual market decline this market is experiencing, at -19% year-on-year in July. But if we remove sedans, the Chinese overall sales would be up 19% year-on-year instead of down (see below).

Segment Jul-15 Jul-14 Evo
Sedan 694,069 860,626 -19%
SUV 403,091 286,852 41%
MPV 107,807 117,243 -8%
Microvan 74,300 88,452 -16%
Total SUV/MPV/Microvan 585,198 492,547 19%
Total Passenger Cars 1,279,267 1,353,173 -5%

The imploding of the sedan market is literally unheard of in China, a market that has regularly gained ground year after year for the best part of the past three decades. Right now, an affordable SUV offering is becoming vital for a brand’s sales performance in the #1 market in the world, which is uncharted territory. But as we detailed in Part 1 of this Strategy series, Volkswagen has missed the SUV boat and put all its eggs in the sedan basket with 87% of its sales still happening in the latter segment. If Volkswagen-branded locally assembled cars are down 31% in July, Volkswagen sedans are down an even more depressing 33% year-on-year, going from 197.332 units in July 2014 to just 133.176 last month.

VW Jetta China July 2015Chinese VW Jetta sales are down 43% year-on-year in July.

This is still by far the highest volume for any brand in China in the sedan segment – and overall, but the freefall is real and affects all of Volkswagen’s stars: the Golf (-11%), Lavida (-16%), Sagitar (-36%), Bora (-40%), Santana (-42% despite the arrival of the Gran Santana hatch), Jetta (-43%), Magotan (-44%), Passat, CC (-49%) and Polo (-50%) are all plunging a lot faster than the market. Toyota, Chevrolet and BMW also rely too much on their sedan lineup with up to 85% of their sales still happening in that segment, yet they are not suffering as much as Volkswagen is at the moment. Why are Volkswagen sedans particularly hard-pressed?

Model July sales July evo Price range (yuan) Price range (US$)
Volkswagen models
VW CC 2,101 -49% 252.800-342.800 39.450-53.500
VW Magotan 9,024 -44% 199.800-334.800 31.200-52.200
VW Passat 5,872 -49% 169.800-322.800 26.500-50.400
VW Lamando 6,031 new 145.900-213.900 22.800-33.400
VW Sagitar 17,212 -36% 131.800-225.800 20.600-35.200
VW Golf 12,958 -11% 121.900-238.300 19.000-37.200
VW Lavida 29,425 -16% 112.900-168.900 17.600-26.400
VW Bora 10,489 -40% 107.800-148.300 16.800-23.100
VW Polo 9,528 -50% 85.800-158.900 13.400-24.800
VW Santana 14,840 -42% 84.900-138.900 13.200-21.700
VW Jetta 15,696 -43% 82.800-119.300 12.900-18.600
Chevrolet Sail 9,301 -18% 59.900-73.900 9.300-11.500
Chinese models
Geely GC9 3,200 new 119.800-229.800 18.700-35.900
ChangAn Eado 10,214 -22% 73.900-119.900 11.500-18.700
Geely Emgrand 11,373 107% 69.800-100.800 10.900-15.700
ChangAn V5 2,696 18% 65.900-79.900 10.300-12.500
Brilliance H330 3,025 -35% 65.800-75.800 10.300-11.800
Baojun 630 1,207 -33% 65.800-95.800 10.300-14.900
Great Wall C30 1,096 31% 64.500-83.500 10.100-13.000
Geely Vision 5,921 282% 52.900-65.900 8.250-10.300
BYD F3 6,330 -2% 49.900-70.900 7.800-11.100
ChangAn V3 5,285 26% 43.900-48.900 6.850-7.650
Geely Panda 2,453 98% 37.900-59.900 5.900-9.300

Domestic brands are back

Volkswagen has no offering contained below the symbolic 100.000 yuan price point (US$15.600), when Chevrolet does: the Sail, priced from 59.900 to 73.900 (see above). On the contrary, it is rare to find a Chinese model priced above that same 100.000 yuan barrier. If up until 2014, the price advantage of Chinese manufacturers was justified by poorer quality, reliability and performances, this is becoming less and less true. Sedans are where domestic manufacturers have been lagging behind in recent years, but they are catching up on lost time, and fast.

Geely Vision China 2015. Picture courtesy 91aiche.comVastly improved: the US$ 8.250 Geely Vision.

The most striking example is Geely. As I detailed in my coverage of the 2015 Shanghai Auto Show, Geely models have improved so drastically over the past 12 months than they put Volkswagen fares to shame in some quality aspects. All the while when costing significantly less: the interior quality of the newly revamped Geely Vision (starting price US$ 8.250) has nothing to be ashamed of vs. the much dearer VW Santana (starting price US$13.200)… My words were: “the slow and soft opening of the Geely Vision glovebox is lightyears ahead of a VW Santana glovebox that crashes onto your knee with a flat, hollow and very cheap “clang!”.

Model China starting price US starting price
VW CC US$ 39.450 US$ 33.595
VW Passat US$ 26.500 US$ 20.995
VW Sagitar / Jetta US$ 20.600 US$ 15.695
VW Golf US$ 19.000 US$ 17.995

At the same time, even though all Volkswagen models described in this study are manufactured locally and thus benefit from much lower labour costs as well as the recent devaluation of the Chinese currency, the cars that are also on sale in the U.S. are frankly over-priced in China (see above). In short, Volkswagen has some margin to move down in China when pricing is concerned. In the face of increased competition, miking the Chinese cow will become harder and harder for the German carmaker.

Geely Panda CrossNo foreign competition: the Geely Panda starts at US$ 5.900.

Reliability issues

Has Volkswagen been resting on its laurels in China? Even its low-end Jetta and Santana are priced significantly higher than equivalent Chinese fares, and it looks like they are already truly scraping the bottom of the barrel as far as German quality is concerned. Volkswagen is still the most popular brand for Chinese consumers, one proof being the long queue for VW leaflets at the latest Shanghai Auto Show. But whereas the German brand has sold more than double any other brand each month of the past 30 years it has been present in China, it is not obliterating competition when looking at JD Power Chinese satisfaction surveys (see examples below).

JD Power Sales Satisfaction Index 2015

Both Volkswagen joint-ventures are well below the leaders (#8 and #12) in China’s Sales Satisfaction. Source: J.D. Power Asia Pacific.

JD Power Customer Service Index 2015

Volkswagen also lags behind (#19) in Customer Service Satisfaction… Source: J.D. Power Asia Pacific.

JD Power Initial Quality 2014…but still tops Initial Quality scores (Note: this is not consumer perception). Source: J.D. Power Asia Pacific.

Another element that may have negatively impacted the Chinese customer’s reliability perception of the Volkswagen brand is its recent local recalls. Faced with VW’s reluctance to admit its fault, the Chinese government had to interve – no less. In March 2013, VW recalled over 380.000 vehicles in China, but not after the state television featured complaints about vibrations, loss of power and sudden acceleration in models including the Golf, some of it linked to dual-clutch gearbox flaws. The situation was so serious that it warranted a public apology by the head of VW China Jochem Heizmann at the 2013 Shanghai Auto Show.

In November 2013, 640.000 VW Group vehicles were recalled in China due to issues related to the lubricant replacement in seven-speed dual-clutch gearboxes. In August 2014, China’s General Administration of Quality Supervision, Inspection and Quarantine had to step in and contacted Volkswagen to deal with complaints of broken rear shafts from Sagitar owners, after the German carmaker claimed the problems were isolated incidents and vowed to sue anyone spreading “untrue” information about their products, according to U.S. website The Truth About Cars. In April 2015, Volkswagen announced the creation of a “Special Channels” program to “further enhance customer care and ensure customer satisfaction”, recognising the negative reliability perception it is now facing.

VW SantanaVW Santana in Urumqi, Western China.

Volkswagen: the default foreign choice

One of the first foreign carmakers to manufacture locally along with Citroen, Volkswagen has long been synonymous with the status that is associated with car ownership in China. It is still to this day an extremely aspirational brand, that has managed to remain relatively affordable for the well-off urbanites from the East Coast, as I described in my April 2013 article China: How local brands may finally find their mojo at home. Volkswagen has catered for and evolved with Chinese car buyers needs for the past three decades. This status as the “default brand” in China has enabled the continuation of its sales dominance, but it also means Volkswagen has become the one brand that Chinese buyers put in the balance when hesitating with a Chinese marque.

In a sense, Volkswagen is the safety valve of foreign manufacturers in China: when consumers mull a return to their much-improved domestic carmakers, Volkswagen sales are the first to suffer as a result. The more significant the shift towards domestic carmakers, the more fragile VW sales. A few years ago when domestic carmakers were at their lowest, Chinese consumers would rather pay almost double for the assured reliability and status of a Volkswagen Jetta or Santana. After a couple of years of much-advertised reliability trouble (see above) and constant progress from domestic carmakers, this same choice between Volkswagen and local fares is starting to weigh in favour of brands such as ChangAn and Geely. In short, Volkswagen is taking the brunt of the reconciliation of Chinese buyers with their domestic brands.

BMW 3 Series L China September 2014. Picture courtesy of auto.ifeng.comVolkswagen may be losing replacement sales to more luxurious brands such as BMW.

Is the market moving away from the Volkswagen brand?

Apart from its vulnerability to local brands, Volkswagen’s woes in China may also have to do with timing. Four full years after the government put in place licence plate limitations to curb congestion and pollution in Shanghai and Beijing, a dozen cities have since been added to the list. As a result, the East Coast market is slowly but surely moving towards saturation. Increased wealth in these regions enable consumer tastes to move up the luxury scale and further away from bargain basement options. When faced with the prospect of replacing their 2009 Lavida, well-to-do Beijing car buyers may opt for a BMW 3 Series L or Mercedes GLA instead, as Volkswagen may not offer anymore the status recognition they once enjoyed.

Volkswagen may be losing consumer upwards, but they are getting less consumers in at the bottom of the price range. Thanks to aggressive marketing efforts and dense dealer networks, first time buyers in less developed areas of the country nowadays tend to prefer a cheap domestic SUV such as the JAC Refine S3 to a low-end Volkswagen sedan such as the VW Jetta. Seeing the Chinese market as silo’ed segments is an error that Volkswagen has made in the past: the domestic SUV buyers of today are the foreign sedan buyers of yesterday.

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

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)

Strategy: Scrapping aging vehicles the key for Chinese brands?

Dongfeng Xiaokang V27Dongfeng Xiaokang V27

I will resume shortly my Strategy Series “How can Chinese brands unlock their home market?”, but first a piece of information that could have a big impact on Chinese manufacturers in the near future. According to Autonews China, last month President Xi Jinping’s leadership team announced a plan to improve fuel economy and reduce emissions by scrapping no less than 13 million “yellow label” aging light vehicles, cars and trucks that fail to meet emission standards. Even by Chinese standards, 13 million vehicles is a lot! Roughly the equivalent of new car sales in Europe over 12 months… But wait it gets more drastic: Beijing plans to scrap a full 6 million vehicles this year and target the rest of the population of older vehicles over the next 3 year, setting precise targets for each of China’s 31 provinces, municipalities and autonomous regions.

John Zeng, Asia director of LMC Automotive, says these “yellow label” vehicles are mainly light trucks, buses and microvans. So this is good news for China’s domestic automakers, the country’s main producers of light commercial vehicles. To fulfill their scrappage quotas, local governments will have to offer attractive cash-for-clunkers incentives. That will significantly boost sales at domestic automakers as China businesses replace their fleets, and will affect the minivan and MPV segments particularly, and in two ways. It could stop the decline of minivan sales and further boost MPV sales as municipalities upgrade from minivans to budget MPV in the same way a lot of Chinese countrysiders are currently doing. Think from a Wuling Sunshine to a Wuling Hongguang.

Links to Strategy series “How can Chinese brands unlock their home market?” (to be continued soon):

Part 1: Introduction and Medium & Heavy Trucks

Part 2 :Small, Medium & Large Buses and Light Trucks

Part 3: Pick-ups, Mini Trucks and Minivans

Part 4: Commercial Vehicles summary and MPVs