BEIJING -- The expiry of tax breaks for small engine cars will hit Volkswagen's Chinese sales next year, said the automaker's China CEO, Jochem Heizmann.
Last October, China cut sales taxes to 5 percent from 10 percent on cars with engines of 1.6-liters or less, a strong segment for Volkswagen, in a move to help stimulate the car market. That tax cut is set to expire at the end of 2016.
China has been a bright spot for Volkswagen as it’s been embroiled in a global crisis related to using cheat devices to meet diesel emissions standards. The automaker sells few diesel models in China because the government discourages use of the fuel, with the exception of commercial vehicles.
Helped by the tax cuts and signs that economic growth was not slowing as much as feared, VW Group deliveries in China grew 6.8 percent to 1.86 million in the first half.
"If the government really stays on the present decision that this will be sharply stopped at the end of this year, you can expect pre-sales this year, with a bigger negative impact the first quarter of next year," Heizmann said. "But let's see if this really stays this way."
Industry body China Association of Automobile Manufacturers (CAAM) said in June it favored making the tax cut permanent to promote fuel-efficient cars.
"Of course we are talking with the government, with CAAM. Everybody does see this risk so this is what I'm saying that hopefully things will change," Heizmann said.
VW has slightly lagged the overall market, which grew 8.1 percent in the first half of the year, according to CAAM.
Heizmann said growth in the country's car market was expected to moderate in the second half after having outpaced forecasts in the first half.
VW will stick to its 4 billion euro ($4.5 billion) investment plan for China and introduce a larger SUV at the end of this year, he said.
The automaker also plans a smaller, less expensive SUV offering in the coming years. The company also needs to sell more electric vehicles in order to meet China’s fuel-economy targets, Heizmann said.
Profitability is normalizing for VW in China amid rising competition, he said.
VW said last month that first-half operating profit from its Chinese joint ventures fell to 2.4 billion euros from 2.7 billion the year before. Profit before tax in the first half declined to 4.8 billion euros from 7.7 billion while profit after tax was 3.6 billion, down from 5.7 billion.
Bloomberg contributed to this report