"The roof is on fire; this is the last wake-up call," expressed Thomas Schafer, CEO of Volkswagen Passenger Cars brand, during a management meeting last week. His sentiment underscores a crisis that Volkswagen (VW) faces due to soaring costs and the Chinese market.
On July 14, Volkswagen Group disclosed that its delivery volumes for the first half of the year saw double-digit positive growth in various global regions, except for China, which experienced a slight decline.
Once a dominant force in the crucial Chinese market, Volkswagen's leading position now teeters on the brink. Last year, Volkswagen was surpassed by BYD in sales, and this year, the total sales from Volkswagen's northern and southern divisions may still fall short of BYD.
Volkswagen, a titan in the era of gasoline vehicles, now stands at a crossroads in its destiny. Despite early arrangements for an electric future, Volkswagen seems to falter under the pressure of harsh realities and short-term financial stress.
Time is of the essence. As the global landscape of electric vehicles continues to reshape, and as the century-old automotive industry faces upheaval, Volkswagen must hasten its pace.
Growing
Pains In the first half of this year, Volkswagen faced a "Waterloo" moment in China, its most important market.
Overall, Volkswagen Group's global deliveries have been impressive. It delivered 4.3722 million vehicles in the first half of the year, a year-on-year increase of 12.8%. In Western Europe, one of the main regional markets, Volkswagen Group delivered 1.6435 million vehicles in the first half of the year, an increase of 26.9% year-on-year. In North and South America, growth also reached double digits.
However, in China, Volkswagen Group's deliveries dropped by 1.2% year-on-year to 1.4519 million units. China's share of sales fell to 33.21%, less than that of Europe; while in the first half of last year, China was still Volkswagen Group's largest single market, accounting for 37.94% of its sales.
Volkswagen in China also underperformed the broader market. According to data from the Passenger Car Association, retail sales of passenger cars in China totaled 9.524 million units in the first half of the year, an increase of 2.7% year-on-year.
BYD and other car manufacturers' triumphant progress has left Volkswagen struggling to compete, even when combining its northern and southern divisions. In many segmented markets, the product lineup that Volkswagen Group launched in China is being squeezed by new energy vehicles from BYD, Tesla, and others, resulting in inevitable growing pains.
Last year, BYD surpassed FAW-Volkswagen with a sales volume of 1.8046 million units, becoming China's top-selling passenger car brand, ending the history of joint-venture car companies topping the charts. In the first half of this year, excluding overseas sales (74,300 units), BYD's cumulative sales amounted to 1.1813 million units, just surpassing Volkswagen's north and south divisions by over 210,000 units.
If this trend continues, BYD might soon surpass Volkswagen to become China's largest car manufacturer this year.
According to the Passenger Car Association data, sales of Volkswagen's Audi brand in China in the first half of the year were approximately 296,000 units, not only lagging in the BBA (Benz, BMW, Audi) sequence but also further closing the gap with Tesla. In the first half of this year, Tesla delivered 294,000 units in China.
Volkswagen has made some counterattacks. In the first half of this year, SAIC Volkswagen introduced new powertrain systems to revitalize the Touareg and Tuatara models, both achieving a year-on-year growth of 10%. Another flagship model, Passat, also achieved a year-on-year growth of 10% in the first half of the year.
In the end, judging from the retail sales rankings announced by the Passenger Car Association, compared to other joint-venture car companies' double-digit declines, SAIC Volkswagen and FAW-Volkswagen barely held their ground. The former's retail sales in the first half of the year fell by 0.1% year-on-year to 532,500 units, and the latter fell 2.8% year-on-year to 838,700 units.
Compared with the difficulty of defending the gasoline sector, Volkswagen's ID series, which had a good momentum last year, slowed down, demonstrating the difficulties of the joint-venture car companies in transition. Volkswagen Group data shows that its pure electric vehicle deliveries in China in the first half of the year fell by about 2% year-on-year to 62,400 units.
Industry insiders pointed out that, although Volkswagen's ID series is easy to drive and has a good sense of control, it falls short in terms of smart cockpit and autonomous driving performance compared to independent brands. The latter factors are major considerations for a new generation of consumers who value smart connectivity and in-car interactive experiences when purchasing a vehicle. Volkswagen must make a series of adjustments in this regard.
In early July, in the face of independent brands adding features without increasing prices and joint-venture gasoline car prices continually probing lower, both FAW-Volkswagen and SAIC Volkswagen announced limited-time discount promotions for the ID series, with the maximum reduction reaching $10,000.
Recently, there have also been rumors in the market that Audi is preparing to purchase electric platforms from Chinese car companies. In response, Audi China told Wall Street News that it will work together with all parties to formulate strategic guidelines.
Entering a price war and purchasing electric platforms from Chinese car companies seems to show a sense of urgency from Volkswagen. Faced with the Chinese auto market, which is undergoing its biggest changes in history, this long-dominant giant must move beyond its growing pains and find solutions for the new energy era.
Way Out
Volkswagen Group needs a major transformation. Both the MEB pure electric platform and the software subsidiary CARIAD are the accomplishments of the former CEO Diess. After his departure, Wolfsburg fell into frequent changes at the top, with no significant progress in its products.
The key to Volkswagen's reform is still to find a way out in China, the forefront of the new energy market.
At the Investor Day in late June, Volkswagen set a relatively conservative goal: to maintain the top multinational auto company in China and stay within the top three brands in terms of market share.
This is a sober and pragmatic understanding. At the start of his term, Volkswagen China's CEO Stephan Wöllenstein had publicly stated that Volkswagen's main competitors in China are no longer other joint venture brands, but BYD.
To win the final victory in the era of new energy vehicles, Volkswagen also needs to make corresponding arrangements in both the long and short cycles.
A person close to Volkswagen China told Wall Street that the core issue for Volkswagen in China is not how to increase the sales of new energy vehicles, but to consider financial and profit issues as a company. In terms of new energy, the problems to be solved are cost and profitability.
For Volkswagen, gasoline cars are still the cornerstone of its global sales of tens of millions. According to forecasts by institutions such as McKinsey, by 2030, new energy vehicles will account for 50% of the year's car sales revenue. Volkswagen hopes to further focus on gasoline cars, cut off unprofitable low-priced models, and focus on a few core best-selling models.
Wöllenstein also said in early July that although the gasoline car market is shrinking, Volkswagen can maintain considerable profits by virtue of cost and scale advantages.
At the same time, Volkswagen will rhythmically lay out the new energy market. People familiar with Volkswagen said that Volkswagen's most important advantage in China is to translate its advantages in the industrial chain and supply chain into products and costs, and then reflect them in sales.
Both BYD and Tesla can set their own prices in their respective niches, and even start a price war. A core ability is to effectively control costs through vertical integration of the industry. Volkswagen, which dominated the gasoline car era with its supply chain and products, is also well versed in this.
A typical cost is the battery. In May 2020, Volkswagen China spent 6 billion RMB to become the largest shareholder of Guoxuan Hi-Tech in one fell swoop. It wasn't until November last year that Guoxuan Hi-Tech announced that it had obtained the production spot for Volkswagen standard battery cells and is expected to achieve installation in the first half of 2024.
The batteries that Guoxuan Hi-Tech will supply to Volkswagen include lithium iron phosphate batteries. This means that the Volkswagen ID series can add more economical and applicable lithium iron phosphate batteries to the supply chain in addition to the existing Contemporary Amperex Technology Ltd.'s ternary lithium batteries, to provide more cost-effective products. This will also enable Volkswagen China to improve its ability to vertically integrate in the new energy industry chain.
Not only batteries, but also establishing a new R&D company in China, partnering with Horizon Robotics to develop entertainment information systems suitable for the Chinese market, and cooperating in the fields of autonomous driving and chip design. In these areas where it significantly lags behind its Chinese competitors, Volkswagen is catching up and hoping to make changes through it.
However, it will take some time for Volkswagen's current layout to formally transform into advantages in the new energy industry chain. Before the supply chain matures, the dual tasks of securing the base of the gasoline market and exploring the new energy market still need to be coordinated and advanced.
Like the choices of BMW, Mercedes and other multinational automakers, Volkswagen is also making changes in management and working patterns, allowing cutting-edge technology developed in China to be synchronized to other regional R&D centers and quickly adapted to the global market.
Wöllenstein pointed out that Volkswagen in China has been given more autonomy and decision-making power by the Group. By rapidly expanding local development capabilities, Volkswagen Group (China) is gradually becoming the Group's second headquarters.
In the face of the crisis of a "roof on fire", Volkswagen's reform has also gradually entered the deep water. High investments without effectiveness have become the past. Next, Volkswagen will face the challenges of the era through precise investment, focusing on new energy.
This overlord of the gasoline era still wants to continue its glory in the new energy era. What it will face, however, is an unprecedented challenge.
