Volkswagen China Recall May Cost More Than $600 Million

Bloomberg News, March 20, 2013

Visitors view a Volkswagen Golf automobile as part of the Auto Guangzhou 2009 Exhibition in Guangzhou on Nov. 24, 2009.

Source: China Photos/Getty Images

Volkswagen AG (VOW) recalled a record number of vehicles in China to replace defective gearboxes that may result in the loss of acceleration, in a move that may cost Europe’s largest carmaker more than $600 million.

The recall of 384,181 vehicles, conducted by Volkswagen and its joint ventures, include the Golf, Magotan, Sagitar and Audi A3, China’s quality inspector said on its website. While Volkswagen declined to comment on the financial toll, research firm LMC Automotive estimated the replacements will cost between 3,000 yuan ($483) to 10,000 yuan per vehicle.

The move is a blow for Volkswagen, which counts China as its biggest market, as the company sets out to become the world’s largest automaker by 2018. The recall comes less than a week after state broadcaster China Central Television featured Volkswagen customers in China complaining about abnormal vibrations, loss of power and sudden acceleration in cars equipped with the company’s proprietary gearbox technology.

“It’s always reputationally damaging to have to deal with an issue that plays out in the public’s eyes,” said Bill Russo, president of auto consultancy Synergistics Ltd. “Will they take a hit? Of course. The issue is how can they recover from that and how quickly can they recover.”

21 Models

The company is recalling vehicles with the seven-speed variety of its direct-shift gearboxes, bearing the cost for replacing defective equipment and upgrading the software, it said in an e-mail statement. LMC estimates Volkswagen sold about 680,000 vehicles equipped with the potentially faulty DSG gearboxes.

“There have been no injuries or accidents reported due to the DSG gearbox problem, as far as we know,” Volkswagen China spokesman Christoph Ludewig said.

The recall covers 21 types of vehicles including versions of the Scirocco, Bora, Touran, Octavia, Passat vehicles produced as far back as 2008 and as recently as this month, according to the state inspector’s statement.

For Volkswagen, which sold 4 of China’s top 10 selling cars last year, complaints about its gearbox system in China aren’t new. In May, the Wolfsburg, Germany-based carmaker agreed to extend the warranty for the transmission technology to 10 years, compared with the standard warranty of two years, to address consumer concerns.

China’s quality inspector said it began investigating complaints related to faulty Volkswagen gearboxes in March 2012. Two months later, the company extended its warranty for the transmission system after several rounds of talks with the regulator, according to the statement.

Safety Threat

A malfunction of electronics in the gearbox or inadequate pressure may result in the loss of power, presenting a safety threat, according to the regulator. Last May, Volkswagen spokesman Harthmuth Hoffmann said that the reported problems -- noise, vibrations and failure to start in hot and humid weather -- were “absolutely not a safety issue.”

Volkswagen said today that although an electronic malfunction or a lack of oil pressure may result in a power interruption, steering and braking functions wouldn’t be affected. That means that even if the car loses power on the road, the driver would be able to safely stop the car, it said.

China’s quality regulator said it interviewed more than 3,000 consumers, received more than 10,000 reports of faultiness, conducted 12 spot checks and held 7 hearings with automotive experts before concluding that the Volkswagen gearboxes were defective and posed a safety concern.

New Laws

The move also comes after China introduced recall laws this year giving the watchdog broader powers to order investigations and impose fines on companies that fail to call back faulty products in a timely manner. The nation’s legislature approved plans last week to expand the authority of the food and drug regulator amid growing public discontent over quality and safety.

Volkswagen and its ventures sold 2.81 million vehicles in China last year, second only to General Motors Co. (GM) among foreign automakers. The German company and its Chinese partners generated operating profit of 3.7 billion euros ($4.8 billion) last year, up by 1.1 billion euros from the previous year.

Other German automakers have also faced scrutiny in the past week from CCTV, which said it found asphalt in China-made models of cars made by Volkswagen’s Audi, Bayerische Motoren Werke AG’s BMW and Daimler AG (DAI)’s Mercedes-Benz.

Asphalt Audis

Samples taken from vehicles showed traces of asphalt, a road-paving material also used for reducing vibrations, CCTV reported. Owners reported a pungent smell in their cars and physical symptoms such as dizziness and swollen fingers, according to the CCTV report.

Representatives from all three companies said they have started investigations. Audi China spokesman Martin Kuehl said Audi has the same “strict standards” for all of its parts globally, while Daimler spokesman Senol Bayrak said all its vehicles manufactured in China use only imported NVH damping materials that comply with existing regulations.

The three German luxury brands command about 74 percent of China’s luxury segment, according to estimates from researcher IHS Global Insight.

While the report might not significantly affect total luxury car sales, it could push Chinese consumers toward choosing imported models of luxury marques over models manufactured in China, according to John Zeng, Shanghai-based managing director at LMC Automotive. Tata Motors Ltd. (TTMT)’s Jaguar Land Rover and Zhejiang Geely Holding Group Co.’s Volvo Cars may benefit since they focus on imports, he said.

“People will choose the import models, because they realize that on quality levels, the import models are very different from locally-made ones,” Zeng said.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Tian Ying in Beijing at ytian@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Click here to read this article at bloomberg.com

VW Races With GM for 2013 China Crown as Toyota Struggles

Bloomberg News, December 26, 2012

Volkswagen AG (VOW) will vie with General Motors Co. (GM) for the sales crown among foreign automakers in China next year, gaining share as Japanese carmakers led by Toyota Motor Corp. (7203) struggle to recover amid a territorial dispute.

VW, whose luxury Audi sedans are popular with Chinese bureaucrats, hasn’t held the lead in the country since 2004 and will probably sell 2.7 million vehicles in the country next year to GM’s 2.65 million, helped by eight new or revamped models including the Santana, Golf, Skoda Octavia and Audi Q3, according to industry researcher JSC Automotive Consulting. GM’s new offerings include the Cadillac XTS and three Opel models.

Passenger-vehicle sales in China will probably accelerate and gain as much as 10 percent next year, as a rebound in economic growth gathers strength, according to eight analysts surveyed by Bloomberg News. Chinese leaders assuming power in a once-a-decade handover to be completed in March may introduce economic stimulus to increase domestic demand, Autoforesight Shanghai Co., LMC Automotive and Synergistics Ltd. forecast.

“When the economy stabilizes, Chinese consumers will have more confidence to buy cars,” said Lin Huaibin, a Shanghai- based analyst at IHS Automotive. “A lot of indicators have shown economic improvement since September.”

Foreign automakers are stepping up their investments in China, counting on the world’s largest pool of first-time car buyers to help offset declining sales in Europe. Total vehicle sales may surpass 19 million units this year, according to the China Association of Automobile Manufacturers on Dec. 10.

Sales Crown

Globally, Toyota is poised to take back the title of world’s biggest automaker for 2012, as VW fights GM for second place in the final week of the year. Toyota said today its vehicle sales may rise 2 percent next year to reach a record 9.91 million vehicles, spurred by overseas demand.

In China, SUVs will remain the fastest-growing segment as it is “under-penetrated” and caters to the preference of Chinese consumers for roomier vehicles, while smaller cities will become more important for sales, said Steve Man, a Hong Kong-based analyst at Nomura Holdings Inc.

The new leadership, helmed by Communist Party chief Xi Jinping, must decide the pace of market-driven change to boost consumer demand and balance the role of exports and investment.

China said it will seek a higher “quality and efficiency” of growth next year, and target “sustained and healthy development,” the state-run Xinhua News Agency reported Dec. 16 after a meeting of senior leaders in Beijing.

Economic Status

“The new government probably doesn’t want to start its tenure with a weak economy, so in China that usually means more investment spending,” said Bill Russo, president of Synergistics Limited. “The commercial-vehicle segment could be a beneficiary of any economic stimulus as businesses replace products like trucks for construction projects.”

Sales of commercial vehicles, which include buses and trucks, are down 6.8 percent in the first 11 months of this year, compared with a 7.1 percent gain in passenger vehicles, according to auto association data.

The pace of sales may slow in China if more cities implement or tighten measures to control vehicle populations to curb pollution and traffic congestion.

By 2020, another 20 Chinese cities may exceed the car- density threshold of 250 vehicles per kilometer of road, according to McKinsey & Co., which may prompt officials to impose similar restrictions to those in Beijing, Guangzhou and Shanghai.

Santana, Skoda

For Wolfsburg, Germany-based VW, a revamped Santana sedan and expansion of its Skoda brand will help the automaker push into the less-developed Chinese cities, which China Executive Vice President Soh Weiming said last month was its “bread and butter.”

The company didn’t respond to e-mail and phone requests for comment on its plans for China.

The Santana, which starts at 84,900 yuan ($13,625) for the revamped version, is the 10th best-selling car in the country this year, according to the auto association. GM’s Buick Excelle topped the list, with Ford Motor Co. (F)’s Focus in second place and the Chevrolet Sail and Cruze in third and seventh. VW’s Lavida, Passat (PSAT), Jetta, Bora and Hyundai Motor Co. (005380)’s Elantra Yue Dong make up the rest of the top 10 models.

Sales for VW’s mass-market brand Skoda, the Czech carmaker that it took over after the collapse of Communism, rose 6.8 percent to 181,900 units in China in the first nine months, company data show. The country became Skoda’s biggest market in 2010, three years after it started local production.

VW Expansion

“Volkswagen is currently in a position where they can look with a lot of confidence into the next year,” said Klaus Paur, the Shanghai-based global head of automotive coverage at researcher Ipsos. “The Volkswagen portfolio is quite wide. If you take it from a group perspective, maybe they could be number one.”

Along with its joint venture partners, Volkswagen will invest 9.8 billion euros ($13 billion) in new production facilities and products through 2015. GM said last year it planned to invest as much as $7 billion in China in the five years to 2015.

GM could fend off VW with new models coming up next year, such as the Buick Lacrosse and Regal, according to IHS.

“We don’t get too hung up on trying to, in a single year, be too concerned about number one position,” Bob Socia, GM China president, said in a Dec. 18 interview in Shanghai. “But make no bones about it, we’re here to win.”

More Showrooms

GM has the capabilities in manufacturing, dealership and product to compete with the “best of them,” he said. The automaker plans to open 400 more showrooms across its brands next year in China, bringing its total to about 4,200 in the world’s largest vehicle market.

The Detroit-based automaker’s joint venture with SAIC and Wuling Motors, which builds mini-commercial vehicles, will construct a third manufacturing plant in China and increase production capability to 2 million annually at the end of 2015.

In China, Japanese automakers will play catch-up as they step up efforts to regain market share lost after tensions soared over sovereignty of a group of uninhabited islands known as Senkaku in Japan and Diaoyu in China.
Japanese automakers may suffer production cuts into 2014 and lose a combined 650,000 units in vehicle output if tensions don’t abate between the two countries, according to IHS estimates.

That could hurt Toyota, Nissan Motor Co. and Honda Motor Co. (7267)’s plans to reach first-time buyers in smaller Chinese cities, where car sales is estimated to grow around 10 percent annually till 2020, compared with 4 percent in larger cities like Shanghai and Beijing, according to McKinsey.

‘Very Tough’

The situation in China is still “very tough,” Akio Toyoda, Toyota’s president, said on Dec. 20 at a briefing of the Japan Automobile Manufacturers Association, which he chairs. “I hope for the situation to recover as soon as possible.”

Sales of Japanese brands began to show evidence of a recovery in November, according to the Chinese auto association.

“The winter for Japanese brand cars is over,” said Dong Yang, secretary general of the industry group, in Beijing on Dec. 10. “The winter for China’s indigenous auto brands continues. They may face even more challenges next year than this year.”

Chinese automakers’ collective market share in the first 10 months slipped to 41 percent from 42.2 percent a year earlier, according to Mizuho Financial Group Inc. (8411)

Market Share

Foreign automakers will continue to gain market share at the expense of local Chinese carmakers as the Chinese consumer becomes more sophisticated and differentiates between products and brands, said Max Warburton, a Singapore-based auto analyst at Bernstein.

Carmakers like VW will compete to hold on to existing customers like Zhou Weiguo and try to win new converts.

“The quality of a Volkswagen car is undisputed,” Zhou, 54, said while browsing in a Volkswagen dealership in Shanghai on a weekday afternoon. “There isn’t much of a need for maintenance and the cars don’t age or deteriorate quickly.”

The Shanghai schoolteacher bought his first car -- a Santana -- more than a decade ago and plans to stick to the brand. He is considering the Tiguan SUV to replace his Touran.

“If I had to change a brand for my next car, I might consider an Audi,” he said.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Click here to read the article at bloomberg.com

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."

Click here to read the article at Advertising Age

For VW, the Path to Global Dominance Leads Through China

Bloomberg News, November 25, 2012

Jochem Heizmann, president and chief executive officer of Volkswagen Group China. Photographer: Chris Rank/Bloomberg

As Volkswagen AG (VOW) 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 like Lanzhou, in western China.

The capital of landlocked Gansu province, which borders the Gobi Desert, is home to a total of 11 dealerships for VW and its sister brands, Audi and Skoda. With a population of 3.6 million, and GDP per capita of about $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 China Executive Vice President. “Now, we have to expand beyond them.”

Less-developed Chinese cities are VW’s “bread and butter,” Soh said in an interview at the Guangzhou Autoshow on Nov. 21.

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 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 Co. and Toyota Motor Corp. (7203) It is also the first time that VW’s executive overseeing China has been on the company’s group management board, a move VW says increases flexibility and streamlines its daily business there.

Disloyal Customers

At stake is a market that IHS Automotive and Macquarie Securities project will eclipse the combined sales of the U.S., Germany and Japan in three years. VW’s Volkswagen, Audi and Skoda brands account for a fifth of China’s passenger vehicle deliveries, well ahead of General Motors Co. (GM), at 9.9 percent with its Buick and Chevrolet nameplates, according to researcher LMC Automotive. Hyundai Motor Co. stands at No. 3 with 9.7 percent, LMC said.

VW intends to consolidate its lead with aggressive investment that outpaces that planned by rivals. VW’s China ventures have pledged to spend 9.8 billion euros ($12.6 billion) in China through 2015, while GM says it will invest as much as $7 billion in the five years to 2015.

The German company expects that spending differential 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.”

Fourth-Tier

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

The country, already the world’s largest auto market, is set to grow in importance, as a drawn out debt crisis weighs on vehicle sales in Europe.

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

Trained as an engineer with a doctorate from Karlsruhe University in Germany, Heizmann is no stranger to the country.

Shanghai Professor

The 60-year-old oversaw factory expansion in China almost two decades ago when he was in charge of planning and commissioning new passenger-car plants at VW. From 2001 to 2007, Heizmann oversaw global production for Audi (NSU), which now counts China as its biggest market. In 2004, he was made a guest professor at Shanghai’s Tongji University, which has a research partnership with Audi.

VW’s joint ventures with SAIC Motor Corp. (600104) 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 carmaker is also considering a new 300,000-unit plant in Changsha in southern Hunan province, a person familiar with company’s plans said this month.

VW, based in Wolfsburg, Germany, is currently negotiating an extension to its tie-up with FAW, with which it runs a joint venture making the Jetta sedan and the Audi A6L, a luxury model that was stretched to boost its appeal to Chinese buyers.

Skoda Sales

The automaker, which also owns Seat, Bentley and Lamborghini, will have to persuade consumers like 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 6.8 percent to 181,900 units China in the first nine months of this year, company data show. The country became Skoda’s biggest market in 2010, three years after it started local production.

Customer Complaints

Heizmann will also have to work to hold on to existing customers unhappy over faults this year with a direct-shift gearbox system that affected some cars, said Jochen Siebert, Shanghai-based managing director at JSC Automotive Consulting, an industry researcher.

The new China chief “still has to give more reassurance to customers that there isn’t a problem with the engine,” Siebert said. “There have been a lot of problems and they need to find a way to better react.”

The automaker agreed to extend the warranty for the automatic transmission technology to 10 years from the standard two years after customers complained and the quality regulator in March demanded a plan to rectify the problem. Drivers complained of noise, vibrations and, in a few cases, a failure to start in humid weather, the company said in May.

Volkswagen’s China sales will reach almost 2.7 million vehicles this year, or about 30 percent of its global total, Norddeutsche Landesbank predicts. The automaker says it sold 2.26 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.”

Click here to read this article at Bloomberg News

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Chua Kong Ho at kchua6@bloomberg.net

VW Threatens to End GM’s Eight-Year Lead in China

Bloomberg News, October 24, 2012

After trailing General Motors Co. (GM) in China for eight years, Volkswagen AG (VOW) edged ahead in the third quarter, putting it one step closer to its goal of becoming the world’s biggest automaker.

VW’s deliveries in the country jumped 21 percent last quarter, almost triple GM’s growth, to 704,991 vehicles, according to figures the company reported yesterday. That beat the 664,765 that GM reported earlier this month.

Enlarge image

Volkswagen introduced new versions of its Lavida and Audi A4L sedans in the third quarter, and benefited from a territorial dispute that fueled so much anti-Japan sentiment that Toyota Motor Corp. and Nissan Motor Co. saw their September sales in China tumble the most since at least 2008. Photographer: Nelson Ching/Bloomberg

At stake is supremacy in the world’s biggest auto market, which analysts say will likely exceed those of the U.S., Japan and Germany combined three years from now. China is the biggest market for both companies.

“Being No. 1 in China means a lot to their global development,” said Harry Chen, an analyst with Guotai Junan Securities Co. in Shenzhen. “Volkswagen and GM will go through a period of time fighting at close quarters in China and they may take turns grabbing the lead.”

Though the comparisons aren’t perfect -- VW counts Hong Kong and Macau and excludes trucks, while GM does the opposite - - Kevin Wale, GM China’s outgoing president, yesterday confirmed that his company had ceded the top spot for the quarter. Volkswagen declined to comment.

With only one quarter left, GM’s lead of about 77,000 units may be enough for the company to hang on to the annual China sales crown.

The Buick Excelle and Chevrolet Sail were the top two selling cars in China for the first nine months, while VW’s top seller, the Jetta, ranked fourth, according to the China Association of Automobile Manufacturers. VW had five of the 10 best-selling cars through September, while GM claimed three spots, according to CAAM.

Japanese Backlash

Volkswagen introduced new versions of its Lavida and Audi A4L sedans in the third quarter, and benefited from a territorial dispute that fueled so much anti-Japan sentiment that Toyota Motor Corp. (7203) and Nissan Motor Co. (7201) saw their September sales in China tumble the most since at least 2008.

Most GM sedans were introduced two to three years ago and are reaching the end of their product life cycles, making them less attractive to car buyers, according to researcher LMC Automotive.

With more refreshed models in showrooms just as Chinese buyers have turned away from Japanese brands, Volkswagen has been better able to capitalize on the tensions than GM, said Steve Man, a Nomura Holdings Inc. (8604) analyst. Volkswagen is also expanding production capacity faster -- 38 percent growth this year versus GM’s 26 percent, JPMorgan Chase & Co. (JPM) estimates.

Cushion Against Europe

Volkswagen isn’t alone in gaining on GM. South Korea’s Hyundai Motor Co. (005380) and affiliate Kia Motors Corp. (000270) saw their combined sales rise 9.5 percent to a record in September. Ford Motor Co. (F), whose Focus compact is the No. 3 selling car in China this year, reported sales jumped 35 percent.

China has helped cushion the slump in Europe, where car deliveries are headed for their biggest fall in 19 years as the region’s financial crisis continues. Volkswagen, which aims to be the world’s leading automaker by 2018, yesterday reported its biggest quarterly earnings drop since 2009 because of Europe.

Though auto sales in China have slowed in recent months, the market has plenty of room to grow. Vehicle ownership in the country was equivalent to 4.7 percent of the population, versus about 51 percent in Japan and 81 percent in the U.S., according to 2009 figures from the Japan Automobile Manufacturers Association.

Following Jeep

Volkswagen in 1984 became the second foreign auto brand, after Jeep, to produce cars in China. But more recently it has trailed GM as the Detroit-based company and its Chinese partners cranked up production of Wuling minivans, which have outsold all other four-wheel vehicles in China for the past eight years.

While quarterly comparisons only go back to mid-2009, annual data shows Wolfsburg, Germany-based Volkswagen hasn’t held the lead in China since 2004.

Volkswagen is planning to invest 14 billion euros ($18 billion) from 2012 to 2016 in the country to regain its lead. GM said last year it planned to invest as much as $7 billion in China from 2011 to 2015.

To spur sales, GM is expanding capacity and boosting production of its luxury Cadillac lineup in China, Chief Executive Officer Dan Akerson told reporters in Sao Paulo on Oct. 21.

“Of course we’d like to see a more robust market in China,” Akerson said. “To me, it’s not whether you’re the biggest car manufacturer. It’s whether you want to be the most profitable.”

GM’s ability to fend off Volkswagen could hinge on Wuling’s minivans, which start below $5,000 and are used as both passenger-and cargo vehicles. Wuling accounts for about half of the Detroit automaker’s deliveries in China.

Cadillac Slumps

Wuling September sales fell 2.5 percent -- more than the total market -- as the slowing economy hit demand for cheaper vehicles as less-wealthy buyers reined in spending. Speculation the government may subsidize new minivans and small cars to spur growth in rural areas has also made some buyers delay purchases, said John Zeng, director of Asian forecasting at LMC in Shanghai.

While a 3.2 percent increase in Chevrolet sales helped GM avoid an overall drop, deliveries of Buicks tumbled the most since at least 2010 and Cadillac sales fell for a sixth straight month. Those brands are important to GM because they generate more than twice as much profit per car as Wuling, according to LMC.

GM, which like Volkswagen has ventures with SAIC Motor Corp. (600104) and China FAW Group Corp., is adding SUVs, a category that’s been expanding about nine times faster than China’s overall auto industry.

‘Malibu Disaster’

A 1.6-liter engine version of the Chevrolet Malibu, GM’s second-best selling car in the U.S. this year, has been a disappointment since it hit the market in February, said Lin Huaibin, an analyst in Shanghai with researcher IHS Global Insight.

“Malibu is a disaster,” Lin said. The car was unable to effectively compete against the Superb from VW’s Skoda brand and Hyundai’s Sonata, which has sold about twice the 29,000 units GM has managed with the Malibu this year.

Competition between GM and VW, the No.2 and No.3 global automakers, after Toyota, is entering a new era with both announcing in the past four months changes in the leadership of their China businesses.

“Both companies have proven they are strong in this market,” said Bill Russo, Beijing-based senior adviser at Booz & Co. “They are the two big fish in the pond and that’s not going to change even with a shuffling of management.”

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Click here to read the article at bloomberg.com