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Audi’s “engagement” with SAIC a dangerous but necessary move

Get used to Audis produced and sold by SAIC-Volkswagen.

SAIC Motor’s MOU signed with partner Volkswagen Group on November 11 to produce and sell Audis at their joint venture SAIC-Volkswagen, following several days of rumor mills, is the latest shocker in an industry already filled with blockbuster news this year.

Audi’s move is almost like an extramarital affair but a legitimate one at that. Virtually no one in the industry thought that it would ever look for another partner after so many years of success working with FAW operating as a division under FAW-Volkswagen. So when the “engagement” finally came after two weeks of rumors, it still surprised many in the industry who thought it would never materialize.

SAIC and Audi could establish a 50:50 sales joint venture for the distribution of those models and services and the first model could debut at the Shanghai Auto Show next April.

If the final details are agreed upon, nailed down and signed, which are just a matter of time, the landscape of the industry especially the luxury segment will have changed: Audi will soon have two separate distribution channels, the first such structure ever for a luxury brand in China.

The move would allow the leading luxury brand in China to expand production capacity, new channels, as well as work with China’s largest automaker, while avoiding policy rules requiring a foreign automaker to only establish two JVs in China.

It looks like killing three or even four birds with one stone.

But the move is dangerous, in the sense that it has obviously irked existing Audi dealers, who are in the process of establishing the Audi Dealer Committee under China Automobile Dealers Association (CADA). More than 50 dealer groups met in Shanghai on November 15 in a surprisingly peaceful meeting after many of them had submitted a pointed letter to Audi China demanding answers such as how it plans to balance the rights and interest of dealers between FAW-Audi and SAIC-Audi.

Interestingly, Audi issued a statement on November 14 not explaining details of the imminent SAIC tie-up, but instead announcing the deepening of cooperation with FAW over the next 10 years. The 350-word statement only had one sentence at the end confirming cooperation talks with SAIC Motor.

The manner with which the “affair” played out is strange because it was SAIC Motor and Volkswagen that signed the MOU in Wolfsburg on November 11, but a statement was not released from both sides until two days later. While SAIC Motor issued a statement, there was no equal and corresponding statement from Volkswagen Group. It simply felt secretive as if they wanted to hide something.

That may foreshadow Audi’s future tangling relationship with FAW and SAIC Motor, and the tough balancing act, if not dealt with appropriately, could further weaken Audi’s already weakening leadership position in China’s luxury vehicle segment.

This is the reason why Audi looked for a new partner in the first place. The fact that it has contributed much of the profit for FAW-Volkswagen over the years but only reaped small portions of it because it only has a minority 10 percent stake in the JV makes it quite unhappy. Furthermore, Audi is the only luxury brand among the three German luxury brand trios that has sales controlled by the Chinese partner. It was only necessary that it looks for another partner in the hopes of solidifying its right of say as well as its leading position.

Can the “One Audi, Two Systems” work? Only time will tell.

UPDATE : Audi has temporarily halted negotiations with SAIC on network and sales channels, according to an internal letter sent to dealers by Audi China President Joachim Wedler on November 30, a few hours before dealers threatened a major price hike and nine days after they issued an ultimatum threatening to stop taking in more cars from Audi if a satisfactory resolution was not provided by December 1.

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