INGOLSTADT, Germany -- Audi defended a plan that ruined its January sales result, saying the creation of a second joint venture in China would help the company grow while at the same time diversify the considerable concentration of risks in its business model.
Volkswagen Group's premium brand is holding exploratory talks with VW Group's southern JV partner SAIC to build and sell Audi vehicles via SAIC-VW's own retail network. In the short term, however, this has triggered a plunge in sales in Audi's biggest market.
Dealers for VW Group's other China JV, FAW-VW fear the plan will dilute the value of their investments or cost them their contract so Audi agreed to a 10-year growth plan with FAW in January as a sign of its commitment to its current partner that will include all new models and electrified vehicles.
If the talks with SAIC succeed, rather than copy VW's approach by developing two slightly different models for each segment – one for each JV partner – Audi plans to split its existing product portfolio in China, allocating some models to FAW-VW dealers and others to SAIC-VW.
"It's exactly this same two-partner strategy successfully employed by the VW brand that we want for the Audi brand in order to secure market leadership in the premium segment as VW has with the volume segment," said Audi sales chief Dietmar Voggenreiter, who has spent the past nine years in China increasing FAW-VW's Audi volumes nearly tenfold.
Audi's China vehicle sales dropped 14 percent in December, then fell 35 percent to January and 5.8 percent to 32,155 last month.
FAW-VW dealers have been holding off on their orders, while they drafted a catalog of demands that include calling on Audi to pay them billions in compensation.
"We've thought about this very carefully," Audi CEO Rupert Stadler told a Chinese journalist this week in Ingolstadt, Germany, during its annual news conference "We developed a strategy for the next ten years that doesn't depend on monthly results in January, February or March."
Audi sold over 591,500 vehicles in China last year, twice as many as in its second biggest market, Germany, creating a considerable concentration of risks as the rest of its business has not been able to keep pace with the dynamic gains in Asia.
Now that its China sales are sagging, it threatens Audi's overall business. Without January's drop, Audi would have otherwise seen stable global volumes that month instead of a near 14 percent decline. Instead of the slight decrease of 1.1 percent in February, it could have posted a gain had it not been for the troubles in China.
The carmaker sees further potential to grow in China as the 9 percent premium share of the car market catches up with the rest of the world where the average is closer to 15 percent, but tapping into this solely through FAW-VW's dealers would entail "putting all its eggs in one basket" as Voggenreiter explained.
"We've been asked for the past few years if we are too dependent on one market and one joint venture partner with a volume share of 30 percent and more, and this is exactly our answer," he said, pointing then to January's sales plunge. "You are seeing right now what implication that can have on the overall volume development."
Audi's FAW-VW dealers, whose contracts with the brand are set to expire in 2018, formulated a set of demands at the end of February dubbed the "Sanya Document" after the tropical Chinese resort where they met. These included a compensation payment of 28 billion RMB (4 billion euros) to offset losses, as well as calling on Audi to only go forward with the plans after the brand has exceeded 1 million in sales locally.
Voggenreiter vehemently denied speculation that Audi had become unsatisfied with its sole Chinese partner. He also took issue with the claims made by his dealers.
"If you just do the math, the 4 billion for 430 dealers would calculate out to be an enormous amount per dealer [of more than 9 million euros each] that certainly would not equate to operational compensation for some sort of alleged losses often rumored in the press," he said.
The Audi sales chief and China veteran said Audi and FAW monitor the results of its dealer network via an international accounting firm that certifies the results to improve transparency. According to the results, Audi dealers were profitable on average during each of the past three years, despite the fact that 30 percent of the dealerships are younger than three years, and each typically has initial start-up losses.
"We also didn't go on the search for a second partner," said Voggenreiter, when asked by a Chinese journalist. "SAIC made efforts over the years to build and sell Audi premium models, a wish we didn't fulfill many years until now, when we entered exploratory talks."