A whole new world
The rise, fall and rebound of Europes carmakers in China
But two European makers, Volkswagen and PSA/Peugeot-Citroen, put China into the passenger-car business.
They would define and dominate the market for more than a decade.
As Automotive News Europe was going to press for the first time in 1996, though, that market domination already
was coming under assault
from new arrivals. Ten years later, it has been shattered beyond recognition.
In 1984, Volkswagen set up China’s first passenger-car joint venture with Shanghai Automotive Industry Corp. to assemble Santana sedans, a model still in production 20 years later. Then, in 1988, it formed a separate venture with First Automotive Works to introduce the premium Audi brand to China and add the Jetta to the Volkswagen range.
The following year, France’s PSA partnered with the Guangzhou Auto Group. After producing about 100,000 Peugeot 504 and 505 sedans, station wagons and pickups, PSA shut the venture in 1997 and consolidated its operations at its other venture in China, a partnership with Dongfeng Motor Corp.
The Dongfeng venture began producing Citroen ZX hatchbacks and sedans under the Fukang name in 1992.
The importance of the three cars – the Santana, Jetta and Fukang – to China’s automotive development can’t be overstated. So embedded are the three cars in the nation’s collective consciousness that they still are known here as the “three olds.”
Despite the arrival of PSA, though, the emerging Chinese passenger-car market effectively belonged to VW. With its only competition a handful of locally produced Red Flag sedans, some Peugeots and various Suzuki models built under license, the German automaker quickly grabbed control of the market and held a share of about 65 percent for more than a decade.
That control couldn’t last – and it hasn’t.
“The first phase of China’s automotive market – the three models – lasted a pretty long time,” observes Ali Ordoobadi, group vice president in charge of China for partsmaker Valeo. “But a flood of new models from European, American and Asian automakers has made the market totally different.”
Leading the charge and posing the most immediate challenge to VW was General Motors, which began producing Buick sedans and minivans at a $1.6 billion (currently E1.3 billion) greenfield venture with Shanghai Automotive in Shanghai in 1998.
By the end of 2005, the venture, Shanghai GM, had expanded into several product segments and become VW’s principal competitor in China.
Indeed, if minivehicles produced by a venture in which GM has a minority 34 percent stake are counted, VW lost its China sales title to the US automaker in 2005.
Without those units, though, VW still held onto a narrow sales lead.
At the end of 2005, VW held 15.7 percent of the passenger-vehicle market on sales of 490,180 domestically assembled units.
Excluding the minivehicles from its minority-owned venture, GM held an 11.3 percent share on sales of 351,742 domestically assembled units, according to consultants Automotive Resources Asia in Shanghai.
But the bigger threat to VW’s domination has emerged from Korean and Japanese automakers, late arrivals in China that have mounted a relentless pursuit of GM and VW alike.
For example, Hyundai’s sales of domestically assembled cars in 2005 surged 66.2 percent over the year-earlier period to 239,451 units while sales of subsidiary Kia’s models rose 76.1 percent to 110,008 units, Automotive Resources reported. Nissan’s sales were up 137.2 percent to 165,776 units and Honda rose 20.9 percent to 257,017 units.
Meanwhile, Toyota is laying the foundation for a massive expansion in China. Toyota sold 145,687 units in China last year, up 72 percent, and it will begin producing another 100,000 Camry sedans a year this year in a new venture with partner Guangzhou Automotive. Overall, the automaker is installing capacity to produce about 950,000 cars and trucks a year at four plants in China by 2008.
All of those sales gains are coming at VW’s expense.
FAW Volkswagen sales were off 20 percent in 2005, while Shanghai VW slid 29.4 percent, according to Automotive Resources.
Winfried Vahland, president of Volkswagen Group China, says the automaker’s steep loss of market share is an inevitable consequence of increased competition. “It’s normal that we lost share,” he says.
But many analysts here blame VW for its own decline.
“There are a number of issues,” says Jan Borgonjon, president of InterChina Consulting in Beijing. “Poor product lineup, over-engineered models that were too expensive for China, and a weak distribution system all contributed.”
One important factor in VW’s decline has been a marked shift to private demand in China from government demand, which had underwritten the market’s early growth.
With deep-pocket government buyers now a minority in the market, VW and other makers have had to adjust to the needs of price- and equipment-sensitive private buyers by slashing prices and bringing in new models.
To defend its turf and try to stop the slide, VW is investing more in China and is moving to better integrate the operations of its two joint ventures.
The two ventures maintain separate distribution channels and each has traditionally viewed the other as a competitor rather than an affiliate.
VW invested $2 billion in China from 1984 through 1998. It has vowed to spend another $8 billion by 2008 to expand its capacity to 1.6 million units a year, to add new models and to build two more engine plants and expand the existing one.
“Volkswagen is working on a number of models that are suitable for the China market,” says Paul Blokland, director of the Segment Y automotive consultancy in Bangalore, India. “They include a car that costs E3,000 to produce that
would be aimed at China, India and Russia.”
VW also will launch the Skoda brand in China in 2007. The Czech automaker is the low-cost producer in the VW group stable and could yield a competitive edge for VW in China’s increasingly price-sensitive marketplace.
“Skoda has by far the cheapest models at Volkswagen,” says Borgonjon. “[But] its success will depend on how they distribute it. Can they control distribution?”
PSA, meanwhile, is experiencing a renaissance in China.
Buoyed by the reintroduction of the Peugeot brand, sales of Dongfeng Peugeot Citroen in 2005 were up 57.5 percent over a year earlier to 140,399 units.
PSA launched the Peugeot 307 in mid-2004, and also launched the 206 in January.
It will introduce two Citroen models this year as part of an $800 million plan to raise capacity to 300,000 units a year by the end of 2006.
“China is one of PSA’s three main strategic growth markets worldwide,” said Yves Boutin, the French group’s representative in China.
Despite the onslaught they face in the volume segments, European brands still rule China’s luxury car segment, small though it may be.
Volkswagen introduced the Audi brand in China in 1995 and it has been the luxury leader since.
VW sold more than 60,000 locally produced Audi sedans in China in 2004, but sales were off sharply last year. A6 sales were down 8.3 percent to 42,331 units while sales of the A4 tumbled 51.0 percent to 7,770 units, according to Automotive Resources.
Arch-rival BMW, which began local production of the 3- and 5-series models in mid-2004, sold 17,582 domestically assembled cars in 2005, while Mercedes-Benz has just started local production.
But as in the volume segments, the Europeans are once again facing challenges from Asian brands and GM.
Toyota began production of the premium Crown sedan earlier this year and sold 28,248 in 2005, according to Automotive Resources. Toyota also introduced its luxury Lexus franchise into China last year as an import and sells the cars through 15 stand-alone dealerships in major cities.
Other pressure is coming from Honda, which will begin import sales of its premium Acura brand this year; GM, which has begun producing the Cadillac CTS and SRX in Shanghai; and DaimlerChrysler, which has targeted sales of 25,000
locally assembled Chrysler 300C sedans a year here.
Even so, analysts say they expect the Europeans to continue to own the luxury-car market in China.
“The Mercedes and BMW names especially,” says analyst Blokland. “They still convey more prestige than the Japanese brands.”
– James R. Crate contributed