What makes China VW’s ‘most important market’?

23 April 2020 As its largest individual market, China is of great importance to the Volkswagen Group (VW). Likewise, the manufacturer enjoys the top spot as the country’s most popular car brand. With green shoots beginning to emerge as quarantines lift in China, the German carmaker will have even more reason to gaze eastwards. So, what are VW’s plans for the Chinese marketplace and how is this likely to impact the rest of the world? Autovista Group Daily Brief journalist, Tom Geggus explores what makes China such an important market for VW. At roughly 25.8 million units, China accounted for the largest number of vehicles sales in 2019 according to Statista. While it did see a 9% drop in registrations to 21 million units, the country is still recognised as the world’s largest motoring marketplace. Some 40% of all VW Group’s sales are made in China. Unsurprisingly, levels of production were also considerable, with approximately 21.36 million passenger cars constructed there last year. The country’s importance as a marketplace and a manufacturing hub is not lost on one of the world’s largest manufacturers. Herbert Diess, VW’s chairman of the management board, called China VW’s ‘most important market‘. The group offers over 180 models in the Chinese market, produced both locally and overseas. Ranging from affordable VW Passenger Cars to extravagant Lamborghinis and from commercial vehicles to motorbikes, VW delivered 4.2 million vehicles to its customers in China in 2019. COVID-19’s impact While the word ′unprecedented’ enjoys newfound use, it can attribute its recent uptake to the coronavirus (COVID-19). Public health has suffered enormously, as has the global economy, with the automotive industry being a standout case. Helen Beckermann, VW’s head of investor relations, described the pandemic as having a ′significant impact‘ on the group’s business. On a global level, the carmaker withdrew its 2020 outlook as its automotive net cash flow plunged downwards to a negative €2.5 billion in the first quarter of 2020. Operating profit sat at €0.9 billion and its return on sales margin languished at around 1.6%. In China, new-vehicle registrations plummeted by 92% in the first half of February. The China Passenger Car Association (CPCA) said ′barely anybody’ had looked to buy vehicles. Only 4,909 cars were sold in the first 16 days of the month, compared with 59,930 in February 2019. Clear signs of recovery But with China now emerging from lockdown, VW is seeing ′clear signs of recovery‘. All 2,000 of VW brands’ dealership are now open again and in the last weekend of March, they experienced footfall comparable to the same period in 2019. Over 95% of the dealerships of the other locally producing brands like Audi and Skoda have also be reopened.  VW’s China CEO Stephan Wöllenstein said: ′Our dealerships are seeing customers on the showroom floors once again. There are growing signs of recovery, with a good chance that the Chinese car market could reach last year’s level in early summer.’ Plants too have reopened, with 32 out of 33 car and component factories getting back to business, operating at roughly 75% of their utilisation rate. Utilising temperature screening, regular disinfection and personal protective equipment, the carmaker identities employee health as a vital concern. Speaking with Autovista Group, a VW China spokesperson confirmed that among the group’s 100,000 employees in the country, there have so far been no reported cases. In hopes of replicating this success, VW is reapplying these hygiene and safety protocols in Europe. ′We can fall back on what we’ve learned in China in terms of hygiene and organizational measures,’ Diess confirmed in a digital conference. The VW China spokesperson also acknowledged a need to adapt solutions to the individual circumstances of each country. They explained that Chinese New Year prevented a sudden shutdown shock as quarantine came in to effect during a national holiday. So the country was already on hiatus as COVID-19 locked down the nation. This meant large stocks of vehicles and parts had already been built up to weather the break in production. The same was obviously not true across the globe, and coping mechanisms had to be customised to the need of each country. But the manufacturer is also sharing what it has learnt with its 40,000 suppliers and logistics contractors. ′We are reacting to the large number of enquiries received and to the evident demand on the part of our suppliers,’ said Stefan Sommer, board member responsible for procurement. ′We hope to be to help them protect the health of their employees in connection with the resumption of their activities.’ This looks to apply particularly to suppliers who do not have the resources to develop similar measures in such a short space of time. An electrified China Aside from producing useful coping templates in the short term, VW’s post-COVID-19 comeback in China will yield more long-term fruit. ′We think that China is like the powerhouse of the automotive industry, especially regarding electromobility, which has progressed very far here,’ the spokesperson said. In the second half of 2020, VW plans to reach major milestones in its electrification of the Chinese market. The Saic-Volkswagen plant in Anting and Faw-Volkswagen plant in Foshan will begin production of electric vehicles (EVs) using VW’s Modular Electric Drive (MEB) platform. The two sites will have a combined capacity of 600,000 units per year. Following the start of this production, VW’s ID. models will then debut in China. Local production of the Audi e-tron will also get underway in Changchun at the end of the year. By 2025, VW plans to increase production in China to 15 MEB models from various brands. An Ipsos survey of first-time Chinese car buyers found that 41% of respondents had a preference for EVs. While the majority (59%) still said they would opt for a vehicle with an internal combustion engine, this is still a promising indication of the potentially electric direction of the Chinese market. VW’s China spokesperson explained that the government’s electrification strategy is helping support the development of the mobility industry and the purchase of e-mobility cars with subsidies and other incentives. Outside of the potential EV market growth, the Chinese market can still be expected to experience a boom of first-time buyers. The Ipsos study confirmed that COVID-19 is driving first-time buyers away from public transport and towards new vehicles in China. The leading reason being people believe driving will reduce their chances of infection. The VW spokesperson confirmed that the number of first-time buyers in China is relatively high at around 60%, with a drive towards affordable entry-level cars. Adapting to the Chinese market To make the most the growth, VW will lean more heavily into the marketplace with fresh offerings. Last year the carmaker established its Jetta sub-brand, with its own model family and dealer network. The brand is set to target younger Chinese customers looking for their first car. Jetta launched with the VS5 SUV and VA3 saloon. Together with its joint ventures, VW kept deliveries in China stable in 2019, owing particular thanks to their SUV campaign. Within the Passenger Car brand, VW offered a range of locally produced models like the Teramont, Tacqua, Tayron and Tharu and included with imported products like the Touareg. The Audi Q2 L e-tron, Q5 and Q7 contributed too, alongside the Ã… koda Kamiq and Porsche Macan. This trend towards SUVs was mirrored in the results of the Ipsos survey. It was the most popular among first-time buyers, with 47% of respondents identifying it as the body type of choice. Saloons are another favoured segment in China due to their spacious interiors and trunk space. In 2019 VW sold 1.6 million of them in China. Through their two joint ventures and the Jetta sub-brand, VW offers six saloons exclusively in the country to the increased satisfy demand. Enjoying the same level of success as the Passat in Germany, the Lavida was the best-selling model of all manufacturers in 2019 with 491,000 units sold. Another example of this popularity is the Bora, produced by Faw-Volkswagen. The joint venture delivered 323,400 units to customers last year. Meanwhile, the Lamando, built by Saic-Volkswagen, saw more than 101,000 deliveries in 2019. As China demonstrates the possibility of COVID-19 recovery, its market looks set to expand with new first-time buyers. This marketplace will continue to demand new developments in electrification and affordability. With VW adapting to the country’s specific needs, it would do well to ensure China remains its ′most important market’.