Potential China Slowdown Could Dampen Volkswagen’s Sales Growth

by Trefis Team
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China is Volkswagen AG‘s (OTCMKTS:VLKAY) single largest market, constituting ~39% of the company’s net deliveries for 2016. In fact, the impressive 12.2% year-over-year growth in deliveries to China helped the group post a 3.8% overall growth in net volumes and surpass Toyota as the world’s highest-selling automaker in terms of volume sales. Passenger vehicle sales reached 24.4 million units in China last year, up an impressive 15% year-over-year.

Although the Chinese passenger vehicle market grew solidly last year, this was mainly as the government halved the 10% purchase tax on cars equipped with 1.6-liter engines or smaller engines in October 2015, in response to a period of slow growth in the country’s vehicle market. The year-over-over growth rate is expected to slow down in the new year in China, despite the government’s extension of the tax breaks into 2017. The government has extended the tax breaks into this year, increasing the purchase tax to 7.5%, up from last year but down from the normal 10% purchase tax. Customers rushed to buy vehicles at the tail-end of last year, which is why the sales-numbers reflect strong growth.

The Volkswagen brand of passenger cars sold almost 3 million vehicles in the country alone, up 14% year-over-year. To put this into perspective, excluding China, the namesake brand’s overall vehicle deliveries declined 6.4% last year and that of the overall group declined 1%. Volkswagen has been grappling with the aftermath of its very public emissions scandal, but despite the billions in expenses it is facing in the form of recalls, fixes, fines, and settlements, the automaker is continuing to invest heavily in China, irrespective of its cost-cutting plans. The company had announced plans to invest over 4 billion euros ($4.75 billion) in the country in 2016, spending on its new SUVs and plug-in models in the country. SUVs are the highest growth segment in China, growing by 45% year-over-year, and constituting 32% of the country’s overall vehicle market. The Volkswagen brand aims to expand its SUV lineup to 10 models in China by the end of the decade, and will launch the Teramont and the new Tiguan L in the market this year. The biggest fuel to Audi’s growth has also been China, its biggest market, which accounted for approximately 32% of all Audi vehicle deliveries in 2016. Demand for the compact premium sedan A3 and the SUV Q3 have remained high, allowing Audi to report solid results in China.

Volkswagen also plans to introduce 15 new-energy vehicles within five years in China. The country has emerged as a solid potential market for growth of the EV segment. As the country battles excessive amounts of pollution, the government is providing subsidies for electric cars, which can be as high as $16,000, while local governments are giving lotteries for vehicle registrations to customers that are buying electric vehicles. Earlier, the company also announced that its joint venture in China, FAW-Volkswagen, will add five locally-produced Audi e-tron models to its offerings in the country in the next five years, including pure battery vehicles with a range of more than 500 kilometers. [1] Audi will sell two electrified full-size models in China from this year on with the Audi A6 L e-tron as the first locally produced plug-in hybrid and the Q7 e-tron as an import model. One of the main highlights of Volkswagen’s Strategy 2025 is also its push for electric vehicles, which makes more sense for the company at a time when the emissions scandal looms large.

Volkswagen hasn’t backed off from spending big in China and the country has, in turn, helped the automaker boost its financials. However, a possible slowdown in the country’s automotive growth this year could be a potential dampener for the company, which relies heavily on growth prospects in China.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Volkswagen

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Notes:
  1. Volkswagen press release []
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