Strategy: With its new low-cost brand Jetta, Volkswagen is trying to pull a Dacia in China

The Jetta unveiling at the Shanghai Auto Show 2019.

After announcing its creation in February, Volkswagen presented its new entry-level China-exclusive brand Jetta for the first time to the public at the Shanghai Auto Show two weeks ago. The strategy used by the Volkswagen Group is similar to that of the Renault-Nissan Alliance 15 years ago when launching the Dacia brand in Europe, but the context is very different. Can Jetta succeed in a Chinese market that is already filled to the brim with low-cost domestic brands? Did Volkswagen wait too long to launch its low-cost brand in a market that is now getting more mature and sophisticated? Will Jetta cannibalise VW sales in China? Where does Skoda fit in all of this? All questions we will attempt to answer here.

Positioning – Jetta by Volkswagen

What is now officially Jetta has been a long time in the making. In January 2013 at the Detroit Auto Show, then CEO Martin Winterkorn disclosed the company was mulling a new entry-level brand for emerging markets, a target market that was later narrowed to China. It took all this time for Volkswagen to get its new brand right, so we’ll be assuming that they have done their homework very carefully indeed. Jetta models will be manufactured at the Chengdu plant in Sichuan province where the German automaker has been producing the VW Jetta model since 1991 in partnership with First Auto Works (FAW). The Jetta brand will have separate, dedicated Jetta dealerships of which over 200 are planned to open by the end of 2019.

During the Jetta press conference, the German management team outlined that with this new brand, the VW Group will now be able to target the 1/3 of the Chinese market that it hasn’t been able to reach to-date. The target market is clearcut: new families that were until now considering purchasing a Chinese brand for their first car because they couldn’t afford a Volkswagen. Indeed in the entry-level segment 80% of customers are first-time car buyers. According to the Jetta animated presentation at the press conference – supported by a dubious choice of happy-go-lucky dance music, the Jetta brand is “young, fresh, confident, optimistic, straight forward and authentic” and relies on an “inclusive spirit, German engineering and proven reliability.” At least to VW’s credit the messaging has been successfully dumbed down to appeal to all.

Why the name Jetta?

At first sight it seems odd that Volkswagen has chosen an existing nameplate for the name of its new entry-level brand, especially given the fact that the VW Jetta will continue to exist within the German carmaker’s range in China. But it’s actually quite a shrewd decision, as is to be expected from a brand that has dominated the Chinese sales charts for the past three decades. Since its introduction in 1991, the VW Jetta nameplate has sold over 4.2 million units in China, making it one of the most successful nameplates in Chinese automotive history, up there with the Wuling Hongguang or Haval H6. Jürgen Stackmann, Member of the Volkswagen brand Board of Management responsible for Sales, says “In China, the Jetta plays an extremely valuable role for us as a Volkswagen model. It has brought mobility for the masses, just like the Beetle once did in Europe, and is a real icon. This is why we are transforming a model into a brand for the first time in the history of Volkswagen and establishing a separate model and brand family.” Jetta qualifies this heritage with the words “Proud past, bright future” placated all over its Shanghai Auto Show stand.

The FAW-VW joint venture has been producing the Chinese VW Jetta since 1991.

Choosing the name Jetta also enables Volkswagen to forever imprint Jetta’s link with the German brand in people’s memory. It is impossible for a Chinese customer not to think of Volkswagen when seeing the brand name Jetta. This way VW can bring to life the fact that all Jetta models harbour strong VW DNA, like its SUVs that will all be built on Volkswagen’s MQB platform for example. In actual fact as we’ll see further down all initial Jetta models are based on existing VW Group nameplates. Jarred Wong, an Automotive Engineering student also visiting the Jetta stand, told me that  “the Chinese public has a strong emotional connection with VW and the Jetta name”, and that “the Jetta brand now makes owning a Volkswagen much more affordable”, so he believes Jetta will be very successful.

The Jetta lineup will be composed of three nameplates at launch.

The product 

When it hits the market in Q3 of this year, the Jetta lineup will be composed of three models: the VA3 sedan based on the current Chinese VW Jetta, the VS5 5-seat crossover based on the Seat Ateca and the VS7 7-seat crossover based on the Seat Tarraco. Not so “low-cost” after all then, at least in the mechanics aspect. All will be equipped with adaptive cruise control technology and will be available in bright bold colours to contrast with the VW brand, supposed to be more serious. Being present at the Shanghai Auto Show has enabled me to study the interiors of both the VA3 and VS5 in detail, although the VS7 was still locked and blacked-out.

Jetta VA3 details

Another (more dubious) solution VW might choose is to increase the pricing of the VW Jetta so that the Jetta VA3 can start higher, around 70.000 to 75.000 yuan. It’s a very real possibility. Interestingly, the VA3 features a “FAW-VW” (一汽-大众) inscription on the boot (top picture), linking it even further to the Volkswagen brand. Its interior is a mixed bag, with a lot of hard plastics on the dash and doors, but a good-sized digital screen and the body colour replicated on the seats and insides of doors. It’s basic, but clean and happy, not drab.

The new Jetta VA3 could compete with the likes of the Geely Emgrand, Chery Arrizo 5/GX and Roewe i5.

The main objective of the Jetta VA3 will be to steal sales from well-established Chinese-branded sedans such as the Geely Emgrand (247.000 sales in 2018) priced from 69.800 to 98.800 yuan, the Chery Arrizo 5/GX (110.000 units sold last year) available from 59.900 to 113.900 yuan or the Roewe i5 (115.000 for its first year in market) priced from 68.900 to 115.900 yuan. Apart perhaps from VW Group’s own Skoda Rapid (71.900-104.900 yuan) and the Hyundai Verna (72.800-105.800), it’s difficult to find foreign equivalents: they are either cheaper but also much smaller such as the Kia Pegas (49.900-73.900), Hyundai Rena (49.900-73.900), Chevrolet Sail (63.900-79.900) or Toyota Vios (68.800-111.800) or dearer and therefore compete instead with the VW Jetta such as the Hyundai Celesta (79.900-115.900), Chevrolet Onix (96.900-99.900) or Ford Escort (87.800-119.800).

Jetta VS5

A lineup of SUVs makes a lot more sense for the Jetta brand, simply because by and large the SUVs the VW Group sells in China are all on the dearer side. At the moment, the cheapest VW SUVs available in China are the tiny T-Cross at 127.900-159.900 yuan / 16.900-21.200€ / US$19.000-23.700 and the small T-Roc at 139.800-203.800 yuan / 18.500-27.000€ / US$20.800-30.300. Far from affordable as you can verify, and even the Chinese Skoda lineup starts relatively high with the small Kamiq (105.900-126.900) and Karoq (139.900-177.400). There is therefore a large gap in the SUV segment pricing that the VW Group isn’t currently covering. Being a rebadge of the Seat Ateca, the VS5 is in fact also a disguised Skoda Karoq and therefore could start around 100,000 to 110,000 yuan / 13.200-14.600€ / US$14.800-16.300 to allow it breathing space below the Karoq, but Jetta could also decide to instead match its price to the Karoq as to not be too competitive vs. the similarly-sized VW Tharu (from 165.800) and Tiguan (from 194.800). In any case, there would still be room for a smaller VS3 to potentially come in later at sub-100,000 yuan prices.

Jetta VS5 interior details

Quite logically given its naming seems to signify it is higher in the Jetta lineup, the VS5 interior looks and feels better than the VA3 with a larger digital screen (the main talking point for all cars in China), more complete and nice to the touch steering wheel instruments and some elegant design finishes such as the motifs on the third main picture above. But the hard plastics remain in prime position though, notably on the door insides and the passenger dash, plus there’s no digital hand-brake and only a 1980-looking gearbox, all of this keeping the VS5 firmly anchored in the low-cost universe, as much better features are now available on even some of the cheapest Baojun models.

The Jetta VS5 is in fact a rebadged Seat Ateca (pictured above).The Jetta VS5 could compete in price with the likes of the Haval H6 and Geely Boyue… 

The potential pricing of the Jetta VS5 sets off two groups of Chinese competitors, which also means great sales potential for the nameplate. It should logically fight it with such SUV blockbusters as the Geely Boyue (98.800-159.800 yuan), Haval H6 (102.000-134.000) or Chery Tiggo 8 (98.800-142.800). But if its starting price ends up significantly lower than 100,000 yuan, it could also steal sales from the likes of the Geely Vision SUV (65.900-95.900), Baojun 530 (78.800-102.800), Haval H4 (79.000-113.000) or Changan CS55 (82.900-131.900), all very strong sellers also, although this will probably be the role undertaken by a potential smaller Jetta SUV (VS3?). This 2nd set of competitors would unlock China’s most rural markets where cheaper SUVs are all the rage. This is where huge volume remains untapped for the VW Group and this is where the true potential of the Jetta brand lies.

…but could also steal sales from cheaper SUVs such as the Geely Vision SUV and Baojun 530.

Our Automotive engineering student and fellow Shanghai Auto Show visitor Jared Wong thinks Jetta is more premium than Baojun and competes instead with Geely. Looking at the VS5 cockpit I have to disagree as even the Baojun 510, whose tariffs start at a ridiculously low 55.800 yuan / 7.400€ / US$8.300, looks and feels a lot more premium inside. However in the marketing world reality is meaningless, instead perception is reality, so if, despite the vastly different interiors, in this fellow’s mind Jetta competes with Geely, then it does. It’s as simple as that.

The Jetta VS7 is based on the Seat Tarraco (all 3 pictures above)The VS7 could compete with the GAC Trumpchi GS8.

The VS7 will have an easier task fitting in with the rest of the VW Group lineup in China, simply because the 7-seat SUVs it sells are currently far and few between. The most popular in smaller cities (such as Lhasa in Tibet that we’ll explore shortly) is, quite counter-intuitively, the most expensive: the VW Teramont (300.900-505.900 yuan). The VW Tiguan L (218.800-350.800) and Skoda Kodiaq (186.900-268.400) follow, and we should have the Jetta VS7 safely below the Kodiaq so as to minimise cannibalisation. That means the VS7 will indeed compete with the only Chinese 7-seat SUV to hold a blockbuster status: the GAC Trumpchi GS8 (163.800-259.800), but also such much less successful fares as the Roewe RX8 (163.800-246.800).

Will it work?

Launching a standalone low-cost brand that offers a clear value proposition compared to a manufacturer’s historical brand is so fraught with danger that only a handful of Western carmakers have embarked on this adventure, and even less have succeeded. For example, I was very doubtful that Dacia would manage to set itself aside enough from Renault so as to not compete with it and ensure success. Oh how have I been proven wrong a little more each year all through the past 15 years! So it’s possible to succeed, even though Dacia remains an isolated case worldwide. Volkswagen has been mulling its entry-level brand for close to a decade, but launching it in China is the hardest test it could endure as domestic brands have mastered the art of producing great value-for-money low-cost models.

There is another huge difference between the market environment Dacia has benefitted from in Europe compared to Jetta in China. Dacia’s initial buyers, on which the brand has built its success, mainly came from the used car market: the used-to-new sales ratio is 4 to 1 in France for example, creating an immense pool of potential customers. A Dacia was often the only new car these buyers could afford and was competing with a range of similarly-priced used cars. Even though it is growing fast, the Chinese used car market is a lot less developed (used-to-new ratio is 0.5 to 1) and will probably take decades – if ever – before reaching the same used-to-new ratio as more matured markets, also because Asian culture does not particularly favour the purchase of already-used things in general. Therefore Jetta won’t be competing as much with used cars, but almost solely with other new cars by and large from Chinese brands, which could potentially be a much tougher environment.

At launch, Dacia competed with used cars in Europe. It’s not the case for Jetta in China.

Only SAIC-GM have managed to hit a goldmine in China with their low-cost brand Baojun selling over 1 million units in 2017 and now moving towards more upmarket grounds as we’ve seen in our Shanghai Auto Show summary. Dongfeng-Nissan’s Venucia has been selling between 100,000 and 145,000 annual units since 2013 but a similar performance by Jetta would be deemed a failure. As for both Honda’s attempts in the segment (Everus and Ci Ming), they have failed so miserably that both brands were hastily discontinued. Going for it, Volkswagen enjoys superhero status in China and remains the aspirational brand by excellence. Framing Jetta as a more affordable Volkswagen is the key, and given the Chinese name for Volkswagen (大众) is written on the back of each Jetta model, future Chinese owners can even convince themselves – and, most importably, their neighbours, family and friends – that they are in fact driving a Volkswagen. The Chinese are suckers for a bargain and if pricing is sharp enough the Jetta models could indeed feel like cut-throat priced VWs, the “smart buy” angle that Dacia has been playing all this time. But this could also be VW’s demise if Jetta models are too closely linked with VW and seen as so attractive that they cancel the need to actually buy a VW.

Focusing most of Jetta’s marketing energy on the SUV lineup will also be key as there is a lot more competitive space for Jetta SUVs to live in the Chinese market than there is for the VA3 sedan. Also, a (too?) successful VA3 would invariably hurt VW’s bread-and-butter low to mid-level sedan range composed of the Jetta, Santana, Lavida and Bora. As we will discover during our annual China test drives, even the top-spec Lavida has paltry interiors and lacks features (no reverse camera) that are otherwise available on Chinese cars for half the price. Therefore the VA3, that doesn’t really look that much different inside and out, has serious potential to cannibalise VW’s low-end sedan lineup. These 4 VW sedans accounted for a whopping 1.353.739 sales in 2018 in China or 43% of the total VW brand sales, so there is a lot to lose here for VW. The SUV picture is different as VW models’ interior quality is a lot higher, notably for its newest one the T-Cross, and as such they will be less prone to cannibalisation by the Jetta range.

Where does Skoda fit in relation to Jetta in China?

One big question mark is the role of the Skoda brand in this big manoeuvre. Nowhere was the Skoda brand mentioned in any of the Jetta press conference materials at the Shanghai Auto Show, as “Jetta by Volkswagen” is clearly positioned as an affordable Volkswagen without any correlation with the Skoda brand. But the reality is that to be able to reach its full sales potential while minimising the hurt it inflicts to the existing VW Group offering, the Jetta brand will have to be positioned not only below Volkswagen but also below Skoda. This might turn out to be quite problematic, as it will create a gaping hole between Jetta and VW and could make Jetta models too attractive, increasing the risk of cannibalisation. The other option, pricing Jetta at the same level as Skoda, could be suicidal for either brand as they fight with each other for survival.

Jetta VS5 logo detail

Is it too late to cater for the entry-level segment in China as the entire market is moving towards more upscale vehicles, embodied by Baojun’s upmarket aspirations? Yes and no. Yes in Tier 1 and Tier 2 cities which now have their eyes and tastes firmly set towards Mercedes, Audi and BMW and aren’t even worth trying out. But the cards are still up in the air in smaller Tier 3 cities where buyers are the least loyal in the world (16% vs. 49% in Europe) and therefore could be convinced to switch from a Chinese brand to Jetta relatively easily. Finally, once the current sales depression is taken care of, there’s still an enormous untapped sales potential in Tier 4 and Tier 5 cities (the smallest towns as well as rural areas), a huge swath of the Chinese market where there is only 1 vehicle for 5 households, half the national rate. It’s in these regions that the Jetta brand has the most chances to gather significant volumes and, encouragingly, the lineup it is offering at launch matches the tastes of the customers living in these markets.

In essence, most Chinese car buyers would buy a VW rather than a Chinese brand if they could afford to, and Jetta is giving them that chance. That’s what Volkswagen is banking on in China with the Jetta brand, and it could uncover a goldmine of sales, thus replicating Renault’s Dacia miracle in Europe, or dilute the Volkswagen brand image and result in imploding sales…