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VW China’s 30 years of accomplishments: localization and self-defamatio

Although Volkswagen’s arrival in China in 1984 was a landmark event for the automobile industry, Shanghai-Volkswagen’s recent 30th anniversary celebration seemed quite low-key.

Participants came from Volkswagen headquarters in Germany and were joined by top executives from SAIC and Shanghai-Volkswagen. But no government officials were present and there were only 20 or so journalists. Some claim that the understated event was in compliance with the new official regulation against fancy events. But observers cannot help but wonder if it had something to do with the recall of the Sagitar.

To me the event epitomizes Volkswagen’s two conflicting accomplishments over the past 30 years in China: a classic case of successful localization and occasionally acts of self-defamation.

Let us look at localization first. Many people believe that Volkswagen has enjoyed great success in China and dominated the country’s passenger vehicle market simply because it had the courage to venture into China early. Without such courage, it would have been unimaginable for a multinational company to settle in a large area of wasteland and operate with people in an unfamiliar political and cultural environment. Arriving early, Volkswagen was able to take advantage of a blank automobile market where buyers had loads of money and spent lavishly on any cars available.

But other early birds did not fare so well. American Motors and Peugeot also came early. The former and its joint venture Beijing-Jeep were bought out by Chrysler and the latter’s joint venture with Guangzhou Auto went bankrupt.

Volkswagen and its Chinese partners suffered some loss due to the rise of the Euro and the 2004 market slump. But the German automaker survived the difficulties and emerged as the leader of the market. Shanghai-Volkswagen and FAW-Volkswagen have become China’s foremost passenger vehicle enterprises.

Volkswagen’s launch of the Olympic Initiative in 2005 to reduce costs by 40 percent in three years, its introduction of China-specific new models, another three-year efforts to reduce vehicle fuel consumption by 20 percent through its TSI+DSG powertrain strategy and Southern China Strategy worked together to elevate its China business to new heights.

Of the many reasons for Volkswagen’s success, the most important was its localization.

First was the localization of parts and components. The Germans wanted uncompromising compliance to German standards. Volkswagen’s insistence that “even a screw must be flown to Germany for validation” was interpreted by some as “trying to strangle China,” which led to a national level political rift. The conservative and stubborn Germans were nicknamed “square heads,” but their uncompromising vehicle quality standards built a reputation of “durability” and early market competitiveness. In an effort to please the “round-headed” Chinese partners, the flexible Americans and romantic French failed to ensure high quality standards for localized parts and components, leading to poor vehicle products and disastrous failure in the market.

Volkswagen’s unyielding stance on standards of local parts and components may reflect a German national character. It was also out of concern for maintaining the Volkswagen brand image. But as a result, Chinese manufacturers were able to understand the requirements and process of modern automobile manufacturing and lay a foundation stone for a supplier industry up to international standards. No other multinational automaker has left as deep a mark on the history of auto manufacturing in China.

Second was vehicle product localization. It took the “square-headed” Germans 20 years to realize that “we have brought in complex compact cars, but the Chinese want simple and large cars,” in the words of former Volkswagen CEO Bernd Pischetsrieder. Realizing this, Volkswagen started to roll out a series of cars such as the Lavida, the New Bora and a redesigned Passat to specifically cater to the needs of Chinese consumers.

However, as Volkswagen continued to focus on simplicity and size, expectations of Chinese consumers went through a subtle change to opt for better equipped cars. Volkswagen gave up the independent rear suspension two years ago and opted for a cheaper non-independent suspension when it introduced the New Sagitar. But in the meantime, it kept the better performing independent rear suspension for European models. This first led to consumer complaints followed by the most serious quality controversy in China’s auto history and a dramatic recall of the Sagitar due to fractured rear suspension arms. Sagitar owners staged street protests and some of them were arrested by the police.

The controversy is a highly complicated case. Chinese consumers and the media criticized Volkswagen for cutting corners and treating Chinese consumers unfairly. Volkswagen chose to be silent over such claims and allowed various online outlets to form a so-called “professional consensus” about the case: that independent suspension was the original design and the change to a non-independent suspension was made in the eleventh hour; that the last minute alteration of the chassis design created a safety concern and required sufficient time for testing; that logically the suspension arm fracture resulted from collision was a direct consequence of such modification. But reversing the design also seemed risky and would certainly involve more cost, time and resources.

Ultimately, the key question seemed to be which type of suspension was actually the original design. If the non-independent suspension was in fact the original design, concerns over design flaws would be gone. Strengthening or replacing the rear suspension arm would be a solution. Changing into an independent suspension is much more complicated, involving redesign of the chassis, other parts and additional testing. If the non-independent suspension was not the original design, Volkswagen would really have a problem.

Volkswagen remained hush over the debate and failed to communicate with both consumers and the media, explain the rear suspension design and deal with the sensitive issue of national “discrimination.” It was not until Volkswagen’s announcement of a recall of more than a million affected vehicles from both China and the overseas market that people became aware that half of the recalled Sagitars with non-independent suspensions were sold in Europe and America. This shows that Volkswagen was not biased against Chinese consumers. Moreover, it also shows that both the independent and non-independent rear suspensions were the original designs for the New Sagitar. It would have been unimaginable for a global automaker like Volkswagen to make a “last minute design change” of a global strategic vehicle. Unfortunately for Volkswagen, consumer perception of a “last minute change” was already established when Volkswagen resumed the use of independent rear suspension on its Sagitar model introduced in April. Volkswagen China once again failed to clearly and effectively communicate with Chinese consumers and the media to change such a perception.

Volkswagen passed up numerous opportunities to mitigate the concerns of the media and of its loyal consumers. When it did finally make a statement to the public at time of the recall, consumers and the media reacted strongly with all kinds of speculations and photos on the Internet. To add insult to injury, Volkswagen spokesman at the headquarters made the following comment to a foreign news medium: “What we are discussing are serious accidents that involve rear-end collision. Drivers in Europe would send their vehicles to a repair shop. But they don’t do so in China.”

Did none of the Chinese employees at Volkswagen China explain to the spokesman that his comments were suicidal? Or if they did speak up, did the Germans turn a deaf ear? Or was it possible that the Chinese employees did not know who to talk to or didn’t even know what to say?

This wasn’t the first time that Volkswagen makes the same mistake. During the DSG transmission recall, Volkswagen claimed that the issue was due to the manner Chinese drivers were operating their vehicles. Nothing was wrong with the vehicle in the DSG recall, Volkswagen claimed. “Chinese drivers don’t know how to drive.” Now in the Sagitar recall, it claims “Chinese drivers don’t bring their vehicles in for repair.” In less than a year and a half, Volkswagen racked up two similar PR blunders during two unprecedented crises. How could these have happened?

I wrote the article “Volkswagen, From Arrogance to Respect” and a series of other articles a year ago about Volkswagen’s failure during the DSG fiasco. But it does not seem that Volkswagen has learned its lesson. The lack of communication between the company and consumers in the market, between its corporate departments and the echelons of the corporate management is an issue. It is indicative that Volkswagen has not changed its arrogance towards China. Whenever a problem with its vehicles arises in China, Volkswagen has a knee-jerk reaction in pointing a finger at Chinese consumers. This explains why the company’s reaction to the media and public is often so tepid and even skeptical. It is unwilling to respond to what it believes as “unprofessional” comments with “ulterior motive.” Volkswagen’s strong sales after the DSG recall helped reinforce Volkswagen’s apathetic attitude. So did the strong sales of Ford vehicles even after the recall of the Kuga due to a defective and broken front axle.

Although China is now Volkswagen’s biggest market in the world, CEO Martin Winterkorn has not entertained any interview with the Chinese media since 2010. In the face of healthy sales numbers, perhaps Volkswagen believes that it no longer needs to directly listen to voices of the Chinese market. In a recent interview with Der Spiegel, Winterkorn expressed that Volkswagen is performing poorly in the U.S. due to the fact that “Americans want a newly styled car every 2-3 years, and that this has not been addressed appropriately. It is a mistake.” Does this mean that Volkswagen’s attitude towards China will never change until its sales slump?

The success Volkswagen has enjoyed in China in the last 30 years has been phenomenal, but the self-defamation has also been extraordinary. It’s hard to say what will happen with the Sagitar recall because of the still brewing controversy. It seems safe to say that even though Volkswagen may weather this storm, its fall will only be a matter of time if its attitude towards the Chinese market does not change. To people in China the right attitude can be everything. More important, they hate arrogance, the most from foreigners.

(Rewritten by Yuchao Wu based on the author’s article on www.comnews.cn)

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