VW’s path to the top lies in east and west

The Financial Times, December 19, 2011

Click here to read the article at ft.com

During the Frankfurt auto show in September Martin Winterkorn was seen circling Hyundai’s new i30 hatchback, probing every inch of the South Korean car’s fittings with a tape measure and miniature flashlight.

With a retinue of anxious underlings in tow, Volkswagen’s chief executive tested the release of the car’s steering-wheel. When it changed position soundlessly something seemed to snap in VW’s chief executive.

“There’s nothing rattling,” he barked at his chief designer. “We can’t do it, BMW can’t do it – why can they do it?” The moment was captured on camera and soon became a viral hit on YouTube.

The incident underscored both VW’s obsessive attention to high-quality engineering and the carmaker’s acute awareness of the threat posed by its main competitors.

Industry consultants will this year crown VW as the world’s biggest carmaker, but the German company must fight hard to fend off Toyota, General Motors and Hyundai in order to keep the title in the years ahead.

The battle for the number one spot may well be decided in the world’s two largest car markets: China and the United States. For VW, however, these countries represent markedly different challenges.

VW was a pioneer among western carmakers in building local production capacity in China and is now the market leader there.

In contrast, VW has struggled in the US with quality, pricing and brand-positioning issues, and has for years trailed rivals and lost money. To turn this round, it needs to convince Americans that it its cars offer the same value for money as those offered by the market leaders, GM, Ford Motor and Toyota.

In May VW opened a new ultra high-tech plant in Chattanooga, Tennessee, its 62nd around the globe, but its first in the US since its withdrawal in the late 

1980s.

“Success in the US is an important component of our overall 2018 strategy to become the world’s leading automotive company,” Jonathan Browning, head of VW in the US told the FT recently. “The most tangible evidence of this is very much in Chattanooga.”

VW, which in the past confused American carbuyers who were unsure whether it was a premium or a mass-market brand, is pinning its hopes on a modified version of its Passat saloon.

Whereas the prior generation Passat was priced higher than most of its competitors and covered only 8 per cent of the midsize segment, the new model made in Chattanooga comes with a variety of trim levels, engine packages and prices that cover 80 per cent of the midsize car segment, VW says.

“It’s a fundamental shift in how we’re able to participate in the US marketplace,” Mr Browning says. “It allowed us to get this message out that VW is affordable, more accessible, with the same VW qualities, but in reach of a broader population.”

The carmaker’s renewed assault on the US has been backed up by a canny marketing push. Last year VW presented 275 audience members of the Oprah Winfrey show with a yet-to-be-built new Beetle. During this year’s Super Bowl, VW debuted a well-received advert starring a child in a Darth Vader outfit attempting to harness “the force”.

Its efforts may be starting to pay off. Volkswagen’s US sales were up 23 per cent to almost 400,000 units in the first 11 months of the year.

However, Mr Browning must maintain this momentum if VW is to achieve a company target of at least 800,000 US car sales by 2018 and fulfil VW’s goal of returning to profitability in the US by 2013.

The challenges that VW faces in China are of a very different order: holding on to the top spot as the country’s largest foreign car brand.

After entering the Chinese market before its major rivals in 1984, VW has consolidated its position through its successful, highly profitable joint ventures with domestic carmakers SAIC and FAW.

“A significant part of VW’s margin is generated through royalty payments and part sales in China – they’re really making money there,” says Max Warburton at Bernstein Research. “VW uses these profits to subsidise the VW brand in Europe.”

VW has over time moved from selling stripped-down, basic cars such as the Santana, the workhorse of Shanghai’s taxi fleet, to sophisticated models designed expressly with Chinese tastes in mind, such as the VW Lavida and the long wheelbase Audi A6.

“They’ve transitioned from selling what’s on the shelf to adapting products to the unique needs of the market,” says Bill Russo of Synergistics, a China-based automotive consultancy. “That’s proving a solid formula for success.”

VW delivered 2.1m vehicles to Chinese customers in the first 11 months of the year, an increase of 15.5 per cent on the same period a year earlier, cementing China’s position as VW’s largest market.

The company will invest €14bn in 2012-2016, in an attempt to double production capacity to 3m units by 2015 and increase its presence in the south of the 

country.

Many believe Karl-Thomas Neumann, head of VW’s China operations, could succeed Mr Winterkorn as group chief executive, if he succeeds.

Still, VW lacks a model to compete in the increasingly important ultra-low cost segment in emerging markets such as China and India. Although such cars tend not be to very profitable, they are set to become a significant source of industry volume growth in the coming years.

VW’s forged an alliance with Suzuki in 2009 that it hoped would give it access to the Japanese’s small-car expertise. But these plans were left in disarray after Suzuki requested dissolution of the tie-up following huge cultural differences.

The carmaker is now said to working on a stripped down version of its new small car, the Up!. “VW needs to develop a really cheap car if it wants to maintain a dominant role in the global car industry,” says professor Ferdinand Dudenhöffer at the centre for automotive research at the university of Duisburg-Essen.

American automakers prepare for China tariff

China Daily, December 19, 2011

New taxes on US cars may not make big dent, analysts say

NEW YORK - While American politicians have lashed out against China's new two-year tariff on imported cars from the United States, business analysts don't expect them to have that much of an effect on the industry.

China's Commerce Ministry said on Wednesday duties between 2-21.5 percent would be imposed starting on Thursday on large cars and SUVs with 2.5-liter engines and above.

Chinese authorities, citing that US imports were "damaging the local car industry", listed the following companies required to pay the tariff: General Motors Co, Chrysler Group Ltd, Mercedes-Benz US International Inc, BMW's factory in Spartberanburg, South Carolina, and Honda of America Manufacturing Co.

The ministry noted that GM and Chrysler were bailed out by the US government in 2009 and the others have received local government tax credits and other subsidies to support production in the US.

Growth of car sales in the world's largest automobile market has hit a 13-year low, hurting Chinese producers more than foreign automakers.

For some analysts, this appears to be a "retaliatory measure" by China in response to the World Trade Organization rejecting its appeal of a ruling in favor of US duties on imported Chinese tires.

This action, which "reflects the rising tensions between China and the US on trade matters", will have only a small impact on the industry, said Bill Russo, founder and president of Synergistics Ltd, an international advisory firm.

"The impact on GM is very limited. GM imports less than one-half of 1 percent of its Chinese volume, and the imported vehicles in GM's lineup, such as the Cadillac SRX and Buick Enclave, are sold to customers who are less sensitive to prices," Russo said.

JP Morgan analyst Himanshu Patel agrees that China's tariff - 8.9 percent anti-dumping duty and 12.9 percent anti-subsidy duty - won't hurt GM's profits in China much.

Patel, in a research report to address China's import tariffs, cited that GM sold fewer than 32,000 imported vehicles in China, compared to its total of 2.4 million car sales in China.

Ford imports just one model to China and is not likely to be affected. Chrysler, on the other hand, is completely reliant on imports.

"The tariff impacts Chrysler significantly since they import about 24,000 vehicles, and have no local partnerships after the separation from Daimler. This action will have a significant impact on pricing for models like the Wrangler and Grand Cherokee," Russo said.

Chrysler plans to localize production through its majority shareholder Fiat SpA's partnership with Guangzhou Automobile Group, according to Russo.

To account for the new tariff, carmakers will either pass on the higher price tag to consumers or absorb the added cost, which will impact their profit, said Russo. But in the long term, they need to "shift to a localized business model to mitigate such trade risks" he said.

Patel projects China's tariff will motivate GM to produce cars in China. Klaus-Peter Martin, GM spokesman, told Bloomberg in an interview that the company's goal is to build where it sells.

German carmaker BMW leads the pack in "material exposure" to the tariff, with about 25,000 vehicles imported from the US, Itay Michaeli, a New York-based analyst for Citigroup Inc, wrote in a note to clients.

Washington-based US-China Business Council (USCBC), said in a statement that motor vehicles affected by the tariff represents about 3 percent of all American exports to China.

In 2010, the US exported about $3.5 billion worth of motor vehicles to China and this amount is projected to increase to almost $4.5 billion this year.

"The ability for American companies to export and sell cars to China is important," USCBC President John Frisbie said in a statement.

Dongfeng: 30b yuan for own brands

China Daily, December 19, 2011

Ambitious expansion plan by No 2 automotive group

BEIJING - Dongfeng Motor Corp, the second-largest automaker in China by sales, recently announced it will invest 30 billion yuan ($4.7 billion) in its own-brand vehicles over the next fiveyears.

Aspiring to become the top domestic automaker and a first-class international producer, its goal is to sell 3 million of its own-brand vehicles in 2016, up from about 1 million this year.

The automaker based in Central China's Hubei province said a third of the 3 million units will be commercial vehicles. It plans to develop 14 new platforms in the sector in the next five years.

Wholly owned

Another third will be passenger vehicles carrying the nameplates of Dongfeng's wholly owned brands Fengshen and Xiaokang, according to the recently announced plan.

The company said it will introduce 18 new models - cars, SUVs and MPVs - as well as three minivan series before 2016.

Its Fengshen A60 sedan rolled off the production line earlier this month and will go on sale next year. It is the fourth model under the Fengshen brand following the S30, H30 and H30 Cross.

The remaining 1 million vehicles will include cars made at its joint venture with Taiwan's Yulon Motor Co and new local brands developed at its partnerships with Nissan and Honda.

Dongfeng plans to introduce 20 new passenger cars and one family of microbuses as jointventure-built models in the next five years.

Zhu Fushou, managing director of Dongfeng, said the company will fight "on two fronts" - with joint ventures and its own-brand businesses.

The company said it aims to increase the ratio of R&D investment to 3 percent of revenues, upfrom the current 2.36 percent.

Slow to develop

Along with boosting sales, industry observers said the ambitious plan is designed to respond to criticism that State-owned automakers have long been slow to develop homegrown brands, instead relying on foreign partners to generate sales and improve technology.

Dongfeng has joint ventures with Japanese carmakers Nissan and Honda, South Korea's Kiaand France's PSA Peugeot Citroen.

Other large State-owned carmakers - SAIC Motor Corp, FAW Group, Chang'an Automobile Group, Beijing Automobile Group and Guangzhou Automobile Group - all have lucrative Sino-foreign joint ventures, but generally lack competitiveness with their wholly owned brands.

Dongfeng sold some 2.8 million vehicles in the first 11 months of this year - an increase of 12 percent from a year ago - and is expected to break the 3-million-unit benchmark in full-year sales. But only 300,000 - or 10 percent - are its own-brand cars.

Domestic drop

The market share for domestic-brand cars was down 1.5 percentage points to 29 percent inthe first 11 months, according to China Association of Automobile Manufacturers. As well, most domestic brands compete in the medium and low-end segments, which have thin profit margins.

Zeng Zhiling, director of JD Power-LMC Asia Pacific Forecasting, said that the decline in share for domestic brands was mainly due to the expiration of government subsidies on small engine vehicles that over-stimulated customer demand over the previous two years.

He predicts their share will bounce back to more than 30 percent next year on favorable government procurement policies and a resurgent overall market.

Domestic carmakers are also working hard to improve competitiveness.

SAIC Motor Corp, the largest automaker in the country, announced earlier this year that it will invest 22 billion yuan in its wholly owned brands Roewe and MG between 2011 and 2015.

Beijing Automobile Group rolled out its first own brand car at the end of 2010 and plans to introduce more than 20 new models over the next five years, including cars based on the Saab technologies it acquired. The company's goal is to reach annual sales of 700,000 own brand vehicles in 2015.

Guangzhou Automobile Group unveiled its first own-brand car last year carrying the badge Trumpchi. An SUV from the new brand made its debut at the Guangzhou auto show in November.

Fierce market

But domestic brands will be battling in the world's fiercest market. China now has the most carbrands on sale than any other country and already successful, global brands are racing to greatly expand production.

Local products will struggle for the foreseeable future in such a crowded, hyper-competitive market, said Bill Russo, senior advisor at consultancy Booz & Co.

As well, a significant number of used cars will add additional competition, as many consumers prefer a foreign-brand used car as a reasonably priced alternative to a new Chinese model, he said.


Click here to read the article at chinadaily.com

China hits back at US car imports

The South China Morning Post, December 16, 2011


Beijing slaps punitive duties in move seen as retaliation for sanctions on Chinese tyre exports

by Neil Gough

Beijing's decision to impose anti-dumping duties on cars imported from America appears to be politically rather than economically motivated, but that will have minimal impact on the US car industry, say analysts and industry executives.

Starting yesterday, the Ministry of Commerce began slapping punitive duties of between 2 per cent to 21.5 per cent on exports of United States-made big-engine cars and SUVs to China.

That is in addition to the 25 per cent tariff it currently assesses on imported cars, the maximum allowed under the terms of its World Trade Organisation entry agreement.

The move appears to be Beijing's retaliation after China lost its final appeal to the WTO in September against a 2009 US move to impose anti-dumping duties on tyres imported from China.

Nevertheless, analysts said the real impact of China's punitive duties on US carmakers would be minor.

"This appears to be a retaliatory measure taken by China which only strikes at the margins, since the import car market has a rather small share of the auto market," said Bill Russo, a senior advisor at Booz & Company and the former head of Chrysler's business in China.

"Normally, such actions are taken in order to help local manufacturers. However, this makes little sense in this case, as no local manufacturer directly competes in the price segments where imported cars are positioned."

General Motors, Ford and Chrysler collectively sold 1.37 million cars in China in the first 10 months of this year, of which more than 95 per cent were made in China, according to data from JD Power and Associates. About 58,000 of those cars were imported, and not all from US plants.

"This looks like a case of killing the chicken to frighten the monkey," said Michael Dunne, president of industry consultancy Dunne & Company and author of American Wheels, Chinese Roads: The Story of General Motors in China.

"China wants to send a signal to Washington: `See how quickly we can move on your car imports? What if we decided to target Boeing instead?' Now, that would really sting."

Chrysler cars account for many of the low export volumes of US-made cars to China, as Chrysler does not have a production presence there.

The US car exports affected include Honda America's small-scale imports, a few models under General Motors' Buick and Cadillac brands, and high-end, US-made Mercedes-Benz and BMW SUVs.

"GM generally builds where we sell," Shanghai-based spokeswoman Dayna Hart said yesterday.

"In fact, GM's import volume out of the US is less than half of 1 per cent of its domestic production in China and is limited to selected Buick and Cadillac models."

Ford spokesman Trevor Hale said: "We don't export any vehicles from the US to China. Our entire China vehicle portfolio - except for the Edge [SUV], which is imported from Canada - is built locally."

US car exports to China tend to be high-priced, low-volume models whose buyers are wealthy.

"Luxury car buyers are typically more affluent and are not going to fret over this extra cost," Samsung Securities car analyst Steve Man said.

"We see little or no impact to demand for luxury cars as a result of these new duties."

Click here to read the article at scmp.com

China Imposes New Tariffs on U.S. Vehicles

The New York Times, December 14, 2011


by Keith Bradsher


Click here to read the article at nytimes.com

GUANGZHOU, China — The Chinese government increased trade tensions with the Obama administration Wednesday evening by unexpectedly imposing antidumping and antisubsidy tariffs on imports of sport utility vehicles and midsize and large cars from the United States.

The new tariffs, totaling up to nearly 22 percent of the import prices, will probably have a mainly symbolic function, rather than reducing the already skimpy sales of such vehicles in China. Other tariffs and taxes already in place have limited sales of American imports by helping raise their retail prices by about three times what the same cars and S.U.V.’s sell for in the United States.

Still, firing a trade volley at American exports of automobiles, one of the most politically sensitive industries in international trade, can only escalate trade hostilities between China and the United States.

China’s move drew immediate criticism from the Obama administration.

“We are very disappointed in this action by China,” said Carol Guthrie, a spokeswoman for the Office of the United States Trade Representative. “We will be discussing this latest action with both our stakeholders and Congress to determine the best course going forward.”

The Commerce Ministry of China, which has conducted a two-year trade investigation of the American imports, gave no explanation for its decision to impose the duties. Ministry officials could not be reached for elaboration Wednesday evening.

The duties would mainly affect General Motors, which exports Cadillac S.U.V.’s and cars to China; Chrysler, which exports Jeeps; the BMW Group of Germany, which exports BMW S.U.V.’s from South Carolina; and Daimler of Germany, which exports Mercedes S.U.V.’s from a factory in Alabama.

Because of the high Chinese tariffs and taxes already in place, the vehicles are sold only in the thousands or even hundreds in China, and only to the most affluent. (A Jeep Grand Cherokee that begins at $27,490 at dealerships in the United States costs $85,000 or more in China.)

The White House announced last week that it would ask the World Trade Organization next Monday to open an inquiry into Chinese restrictions on imports of American broiler chickens.

More significantly, Chinese government agencies and companies have been furious about a current American investigation into whether Chinese solar panels exported to the United States might have received illegal subsidies or been dumped in the American market at prices below the cost of manufacturing them.

American officials have previously examined the methodology of China’s two-year-old antidumping and antisubsidy investigation of American-made automobiles and have found “significant problems,” said Ms. Guthrie, the United States trade spokeswoman.

One challenge for China, which recently celebrated its 10th anniversary as a member of the World Trade Organization, is whether Wednesday’s action will be allowed under W.T.O. rules.

The trade organization places many limits on a member nation’s ability to impose antidumping and antisubsidy measures, particularly on goods from countries that the W.T.O. has declared as having market economies, like the United States.

“Dumping” might be hard to demonstrate, given that the prices of the American vehicles — even before China’s tariff and tax markups — tend to be higher than in the United States.

The Chinese accusation of subsidies may be linked to previous comments by Chinese officials questioning whether the Obama administration provided too much federal assistance to G.M. and Chrysler two years ago during the global financial crisis.

China started the automotive trade case two days after President Obama imposed steep tariffs on surging imports of Chinese tires in September 2009. After an inquiry, the W.T.O. ruled this autumn that the American tariffs on tire imports had complied with international trade rules.

The new tariffs China imposed Wednesday will be antidumping duties of 8.9 percent for G.M. vehicles, 8.8 percent for Chrysler, 2.7 percent for Daimler and 2 percent for BMW.

The ministry separately imposed additional antisubsidy duties of 12.9 percent for G.M. and 6.2 percent for Chrysler.

The ministry’s statement said that all of the new duties would be calculated on vehicle prices that include China’s existing 25 percent import tariff for all family vehicles. So buyers will effectively pay the new antidumping and antisubsidy taxes on other Chinese taxes in addition to paying the new taxes on the value of the car.

China’s import tariff is much higher than those of other big auto manufacturing nations. The United States, for example, assesses a tariff of 2.5 percent on imported cars, minivans and S.U.V.’s.

The new Chinese duties will apply to sport utility vehicles and cars with engines of 2.5 liters or greater that are imported from the United States. The duties will be in place for two years, through Dec. 14, 2013, according to the ministry’s announcement.

BMW said that it anticipated little effect from the duties, Daimler said that it was studying them, and Chrysler had no immediate comment.

General Motors said in a statement that it was “working with relevant authorities to understand the impact of the Chinese government’s decision.” G.M. added that it would “seek a solution consistent with a constructive global trade environment, which we believe is important to both China and the U.S.”

G.M. is a leading producer of automobiles in China, through a series of joint ventures with Chinese partners. The company’s statement said that imports from the United States represented “less than half of 1 percent of its domestic production in China.”

By contrast, Chrysler’s sales in China are solely imports. The company was not allocated any factories in China when Daimler dissolved its merger with Chrysler in 2007.

As a result, Chrysler’s sales in China are tiny — only 13,686 Jeeps, 10,970 Dodges and 284 Chryslers in the first 10 months of this year, according to LMC Automotive, a British consulting firm.

Bill Russo, a former Chrysler executive who oversaw the company’s operations in China until 2008 and is now an industry consultant in Beijing, said in a telephone interview Wednesday evening that while some Chinese trade actions might benefit Chinese industries, it was unlikely that the latest move was done to help Chinese automakers.

Imported S.U.V.’s and cars cost so much more than Chinese models that “people are not shopping these on price,” Mr. Russo said. “No local company makes a product even close.”

Imported models already cost much more in China compared with their home markets because of steep Chinese tariffs, value-added taxes and a system of sales taxes that range from 1 percent on fuel-sipping subcompacts to 40 percent on large sport utility vehicles and sports cars.

The Chinese Commerce Ministry’s announcement on Wednesday was the latest in a series of zigzags on trade policy this autumn, as Chinese officials have struggled over how confrontational a stance to take now that the Obama administration has begun to challenge Chinese trade policies more aggressively.

Just three days ago, President Hu Jintao gave a conciliatory speech to observe China’s W.T.O. anniversary. Mr. Hu said that China would further open up its international trade.

But last week, the Commerce Ministry strongly criticized a recent preliminary decision by the United States International Trade Commission, which concluded that imports of Chinese solar panels had hurt American solar panel manufacturers. That decision moves the United States one step closer to imposing antidumping and antisubsidy duties on Chinese solar panels early next year.