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VW Races With GM for 2013 China Crown as Toyota Struggles

By Bloomberg News
December 26, 2012 3:29 AM EST 9 Comments
A man holds a Volkswagen AG (VW) flag, left, alongside the Chinese national flag during the German-Chinese signing ceremony at Volkswagen AG's headquarters.
Photographer: Michele Tantussi/Bloomberg
A man holds a Volkswagen AG (VW) flag, left, alongside the Chinese national flag during the German-Chinese signing ceremony at Volkswagen AG's headquarters.

Volkswagen AG (VOW) will vie with General Motors Co. (GM) for the sales crown among foreign automakers in China next year, gaining share as Japanese carmakers led by Toyota Motor Corp. (7203) struggle to recover amid a territorial dispute.

VW, whose luxury Audi sedans are popular with Chinese bureaucrats, hasn’t held the lead in the country since 2004 and will probably sell 2.7 million vehicles in the country next year to GM’s 2.65 million, helped by eight new or revamped models including the Santana, Golf, Skoda Octavia and Audi Q3, according to industry researcher JSC Automotive Consulting. GM’s new offerings include the Cadillac XTS and three Opel models.

Passenger-vehicle sales in China will probably accelerate and gain as much as 10 percent next year, as a rebound in economic growth gathers strength, according to eight analysts surveyed by Bloomberg News. Chinese leaders assuming power in a once-a-decade handover to be completed in March may introduce economic stimulus to increase domestic demand, Autoforesight Shanghai Co., LMC Automotive and Synergistics Ltd. forecast.

“When the economy stabilizes, Chinese consumers will have more confidence to buy cars,” said Lin Huaibin, a Shanghai- based analyst at IHS Automotive. “A lot of indicators have shown economic improvement since September.”

Foreign automakers are stepping up their investments in China, counting on the world’s largest pool of first-time car buyers to help offset declining sales in Europe. Total vehicle sales may surpass 19 million units this year, according to the China Association of Automobile Manufacturers on Dec. 10.

Sales Crown

Globally, Toyota is poised to take back the title of world’s biggest automaker for 2012, as VW fights GM for second place in the final week of the year. Toyota said today its vehicle sales may rise 2 percent next year to reach a record 9.91 million vehicles, spurred by overseas demand.

In China, SUVs will remain the fastest-growing segment as it is “under-penetrated” and caters to the preference of Chinese consumers for roomier vehicles, while smaller cities will become more important for sales, said Steve Man, a Hong Kong-based analyst at Nomura Holdings Inc.

The new leadership, helmed by Communist Party chief Xi Jinping, must decide the pace of market-driven change to boost consumer demand and balance the role of exports and investment.

China said it will seek a higher “quality and efficiency” of growth next year, and target “sustained and healthy development,” the state-run Xinhua News Agency reported Dec. 16 after a meeting of senior leaders in Beijing.

Economic Status

“The new government probably doesn’t want to start its tenure with a weak economy, so in China that usually means more investment spending,” said Bill Russo, president of Synergistics Limited. “The commercial-vehicle segment could be a beneficiary of any economic stimulus as businesses replace products like trucks for construction projects.”

Sales of commercial vehicles, which include buses and trucks, are down 6.8 percent in the first 11 months of this year, compared with a 7.1 percent gain in passenger vehicles, according to auto association data.

The pace of sales may slow in China if more cities implement or tighten measures to control vehicle populations to curb pollution and traffic congestion.

By 2020, another 20 Chinese cities may exceed the car- density threshold of 250 vehicles per kilometer of road, according to McKinsey & Co., which may prompt officials to impose similar restrictions to those in Beijing, Guangzhou and Shanghai.

Santana, Skoda

For Wolfsburg, Germany-based VW, a revamped Santana sedan and expansion of its Skoda brand will help the automaker push into the less-developed Chinese cities, which China Executive Vice President Soh Weiming said last month was its “bread and butter.”

The company didn’t respond to e-mail and phone requests for comment on its plans for China.

The Santana, which starts at 84,900 yuan ($13,625) for the revamped version, is the 10th best-selling car in the country this year, according to the auto association. GM’s Buick Excelle topped the list, with Ford Motor Co. (F)’s Focus in second place and the Chevrolet Sail and Cruze in third and seventh. VW’s Lavida, Passat (PSAT), Jetta, Bora and Hyundai Motor Co. (005380)’s Elantra Yue Dong make up the rest of the top 10 models.

Sales for VW’s mass-market brand Skoda, the Czech carmaker that it took over after the collapse of Communism, rose 6.8 percent to 181,900 units in China in the first nine months, company data show. The country became Skoda’s biggest market in 2010, three years after it started local production.

VW Expansion

“Volkswagen is currently in a position where they can look with a lot of confidence into the next year,” said Klaus Paur, the Shanghai-based global head of automotive coverage at researcher Ipsos. “The Volkswagen portfolio is quite wide. If you take it from a group perspective, maybe they could be number one.”

Along with its joint venture partners, Volkswagen will invest 9.8 billion euros ($13 billion) in new production facilities and products through 2015. GM said last year it planned to invest as much as $7 billion in China in the five years to 2015.

GM could fend off VW with new models coming up next year, such as the Buick Lacrosse and Regal, according to IHS.

“We don’t get too hung up on trying to, in a single year, be too concerned about number one position,” Bob Socia, GM China president, said in a Dec. 18 interview in Shanghai. “But make no bones about it, we’re here to win.”

More Showrooms

GM has the capabilities in manufacturing, dealership and product to compete with the “best of them,” he said. The automaker plans to open 400 more showrooms across its brands next year in China, bringing its total to about 4,200 in the world’s largest vehicle market.

The Detroit-based automaker’s joint venture with SAIC and Wuling Motors, which builds mini-commercial vehicles, will construct a third manufacturing plant in China and increase production capability to 2 million annually at the end of 2015.

In China, Japanese automakers will play catch-up as they step up efforts to regain market share lost after tensions soared over sovereignty of a group of uninhabited islands known as Senkaku in Japan and Diaoyu in China.

Japanese automakers may suffer production cuts into 2014 and lose a combined 650,000 units in vehicle output if tensions don’t abate between the two countries, according to IHS estimates.

That could hurt Toyota, Nissan Motor Co. and Honda Motor Co. (7267)’s plans to reach first-time buyers in smaller Chinese cities, where car sales is estimated to grow around 10 percent annually till 2020, compared with 4 percent in larger cities like Shanghai and Beijing, according to McKinsey.

‘Very Tough’

The situation in China is still “very tough,” Akio Toyoda, Toyota’s president, said on Dec. 20 at a briefing of the Japan Automobile Manufacturers Association, which he chairs. “I hope for the situation to recover as soon as possible.”

Sales of Japanese brands began to show evidence of a recovery in November, according to the Chinese auto association.

“The winter for Japanese brand cars is over,” said Dong Yang, secretary general of the industry group, in Beijing on Dec. 10. “The winter for China’s indigenous auto brands continues. They may face even more challenges next year than this year.”

Chinese automakers’ collective market share in the first 10 months slipped to 41 percent from 42.2 percent a year earlier, according to Mizuho Financial Group Inc. (8411)

Market Share

Foreign automakers will continue to gain market share at the expense of local Chinese carmakers as the Chinese consumer becomes more sophisticated and differentiates between products and brands, said Max Warburton, a Singapore-based auto analyst at Bernstein.

Carmakers like VW will compete to hold on to existing customers like Zhou Weiguo and try to win new converts.

“The quality of a Volkswagen car is undisputed,” Zhou, 54, said while browsing in a Volkswagen dealership in Shanghai on a weekday afternoon. “There isn’t much of a need for maintenance and the cars don’t age or deteriorate quickly.”

The Shanghai schoolteacher bought his first car -- a Santana -- more than a decade ago and plans to stick to the brand. He is considering the Tiguan SUV to replace his Touran.

“If I had to change a brand for my next car, I might consider an Audi,” he said.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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