China Is Key to Volkswagen's Global Goal of Being No. 1 Automaker

Advertising Age, November 26, 2012

Most Buyers Outside China's Biggest Cities Will Be First-Time Car Owners

As Volkswagen plots a course toward its goal of becoming the world's biggest automaker by 2018, it's increasingly clear that the path to global dominance runs through places such as Western China's Lanzhou.

The capital of the landlocked Gansu province, which borders the Gobi Desert, is home to 11 dealerships for VW and its sibling brands, Audi and Skoda. With a population of 3.6 million and gross domestic product per capita of $4,100, Lanzhou is the type of smaller city away from China's prosperous east coast that VW is targeting in its next phase of expansion.

"Volkswagen's early entry into China meant that our outlets focused on bigger, developed cities," said Soh Weiming, the carmaker's exec VP in China. "Now, we have to expand beyond them."

Less-developed Chinese cities are VW's "bread and butter," Mr. Soh said last week in an interview at the Guangzhou auto show.

Increasing sales in such far-flung places is the primary challenge facing Jochem Heizmann, who took over as VW's China country head on Sept. 1.

The appointment of Mr. Heizmann, a former trucks chief and head of production planning at the company, underlines the importance of China in VW's plans to overtake General Motors and Toyota Motor Corp. It is also the first time that VW's executive overseeing China has been on the company's group management board, a move that VW says streamlines its daily business there.

At stake is a market that IHS Automotive and Macquarie Securities project will eclipse the combined sales of the United States, Germany and Japan in three years.

VW Group's Volkswagen, Audi and Skoda brands account for a fifth of China's passenger vehicle deliveries, well ahead of General Motors, at 9.9% with its Buick and Chevrolet brands, according to researcher LMC Automotive.

VW intends to consolidate its lead with aggressive investment that outpaces the expansion plans of its rivals. The German company expects that to help it win over the next wave of Chinese car buyers, made up of mostly first-timers who have little brand allegiance.

"Chinese consumers are notoriously disloyal," said Bill Russo, president of Synergistics Ltd., a market researcher in Beijing. "Volkswagen's challenge is continuing to build customer relationship management, and be geographically in the high-growth regions."

China's smaller cities will account for 60% of new car deliveries by the end of the decade, up from 40% in the past 10 years, McKinsey & Co. predicts. Car sales in so-called third- and fourth-tier cities will grow 10% annually until 2020, vs. 4% in Shanghai and Beijing, McKinsey said.

The country, already the world's largest auto market, will grow in importance as a debt crisis dampens vehicle sales in Europe.

"Globally, growth will be a bit slow," Mr. Heizmann told reporters on Nov. 21. "China is different," he said. "In China, every business, every brand is selling especially well."

VW's joint ventures with SAIC Motor Corp. and China FAW Group Corp. operate or have announced plans for 11 factories in China, with a targeted capacity of 4 million vehicles a year by 2018. The automaker, which also owns Seat, Bentley and Lamborghini, will have to persuade consumers such as 23-year-old flight attendant Shiny Yao to buy from and stay with the group.

"There are so many choices," said Yao, a Shanghai resident who bought a Honda Civic last month. "If I switch cars, I know I'll not buy another Honda. I'll definitely try something new."

VW plans to recruit more dealers, increase the number of locally made models for its Skoda brand and introduce plug-in hybrid vehicles for sale in the "near future," according to a company statement.

Sales for Skoda, the Czech carmaker that VW took over after the collapse of communism, rose 7% to 181,900 units in China in the first nine months of this year. The country became Skoda's biggest market in 2010, three years after it started local production.

Volkswagen's China sales will reach almost 2.7 million vehicles this year, or 30% of its global total, Norddeutsche Landesbank predicts. The automaker sold 2.3 million vehicles in China in 2011. "For 60 years, the most important market for VW was Germany; they sold around 1 million cars there," said Norddeutsche Landesbank analyst Frank Schwope. "Four or five years back, China overtook the German market. Now VW is still going to sell 1 million cars in Germany, but 2.7 million cars in China."

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