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VW’s first loss in 20 years: cultural challenges in China

With summer approaching in the northern hemisphere, Volkswagen is feeling the chills of winter in China. For the first time in 20 years, the German automaker is losing money.

VW’s two JVs, Shanghai-VW and FAW-VW incurred losses of €17 million ($22 million) in the first quarter of 2005, this in sharp contrast to the €106 million profit just one year ago.

What makes Europe’s largest automaker shudder is a recent report by Goldman Sachs & Co., which predicts that VW’s sales in China will continue to decline this year, incurring a loss of € 411 million. The VW board was forced to reduce this year’s expectation of per-share earnings by 25 percent. Goldman Sachs estimated that in 2003, over two-thirds of VW’s per-share earnings came from China.

VW’s market share in China has been declining at an alarming pace: from 50 percent four years ago, to 29 percent last year; and only 11 percent in the first two months of this year. Despite VW’s claim that this year it has been using end-user sales data, different from invoiced data provided by other automakers, it did not challenge the fact that sales for the first quarter in 2005 were down by one-third compared with the same period of 2004.

VW is not doing well in North America, the other important market of the German automaker. Last year it lost €1 billion in the U.S.Disappointing global performance is forcing VW to consider cutting investment in China. As proof: VW recently announced that it would invest $0.9 billion in Andhra Prades of South India to set up an automobile plant.As the one-time heavyweight carmaker in China, VW is confronted with the challenge of how to survive a harsh winter.

Three musketeers

VW headquarters attributes the poor performance in China to the inability of executives. They are blamed for not adapting themselves well to the local Chinese culture.

In early April, VW shuffled its corporate management in charge of China. Dr. Folker Weissgerber, VW board member responsible for China, will be replaced by Winfried Vahland, vice-chairman of the Skoda unit; Dr. Bernd Leissner, head of China, will retire soon. Walter Hanek, former vice president of VW (China) Investment, has been transferred to Audi Japan.

 As many Germans are leaving, three Asian executives have been appointed in China. Xu Jian, former general manager of Roland Berger (China) and founder of the firm’s auto consulting business, will be in charge of VW China’s strategy and group development; Weiming Soh, former vice president of DaimlerChrysler (China) and director of sales and marketing for Beijing Jeep Corp. will be in charge of sales and marketing; and Guo Qian, former vice president of Beijing-Hyundai, will supervise optimized manufacturing technology. “Compared with GM, which emphasizes localization from the very beginning,” commented a local analyst, “VW’s decision to make changes in human resource management comes too late.”

Product vs. sales network

What bothers Vokswagen CEO Dr. Bernd Pischetsrieder most is the fact that VW’s problems did not arise from product technology or quality; they had something to do with the company’s sales network.

In recent years, VW encountered a strange phenomenon in China: models that were popular in Europe were not welcomed by consumers when they were introduced into China.

“The Touran is no doubt a superb product,” said a Beijing dealer. “People who have driven it all had great comments. But unfortunately it does not sell.”

VW’s bestseller in Europe, the Golf, has had poor performance in China. Even the newly launched Caddy received negative comments on the Internet about its body design.

To turn the tables, Pischetsrieder announced last March in Wolfsburg that VW would readjust its China strategy on three fronts: accurately positioning itself in the market, improving sales and marketing and launching suitable products for China. VW has recently decided that the Skoda will be produced in Shanghai. The new Audi A6 with a longer wheelbase will be released to the market soon. The Caddy, the first high-top MPV based on
FAW-VW’s PQ35 platform, was launched on April 15 in Suzhou. Then came the Touran.

The question is: would these new products help?

“The problem may not be how many different vehicle products you have,” commented Mr. Zhao, a Beijing dealer of multiple vehicle brands. “Beijing-Hyundai has only two models and they are taking the market.” One of the main reasons for VW’s rapid decline in sales, according Zhao, is the lack of communications with dealers.

Zhao said that the high performance of VW vehicles must be made known to consumers, through such simple promotional activities as test-driving. “Take the Touran for example,” he said, “we were given only a few vehicles and were unable to arrange any test driving for interested customers.” There was a broken link between the automaker and its dealers in sales and marketing. “VW often fails to listen to the voice of dealers,” Zhao added.

As one of VW’s earliest dealers in Beijing, Zhao advised early on that VW should not set up too many 4S dealerships in the same city in order to avoid dealer competition. Not heeding such suggestions, VW today faces a serious problem of ferocious internal competition
among its dealers.

VW is now forced to streamline its sales network. For this purpose, it hired Weiming Soh who had successfully restructured Beijing Jeep’s old and ineffective sales network by combining the sales of all three makes of the Jeep, Chrysler and Mitsubishi.

VW has been priding itself on the extensive coverage of its national dealer network. But it now appears that only an effective and effi cient network will be able to help maximize VW’s interests.

Cutting costs

Cutting costs has become the primary task for VW worldwide and it plans to cut €3.1 billion
this year.

In China VW has been challenged by low-cost manufacturing from Korean and Japanese automakers since last year. Due to the company’s huge and complicated organizational and personnel structures in China, it is reported that the cost for producing a VW automobile in China is higher than in Germany.

VW has taken measures to cut costs. It is investing in an engine factory in Dalian to make new engines for the Audi. VW will jointly source parts and components for its two JVs in China. In June, a test center will be established in Beijing to research new low-cost materials.
A Beijing service center will be established in July to integrate the two previously separate aftersales service systems.

Most importantly, the German automaker wishes to integrate its two JVs in China, Shanghai-VW and FAW-VW, most preferably combining two huge sales net-works into one. This would significantly reduce cost in production and sales for VW, but it may not be easy to achieve.

The rising Euro has depleted VW’s profi ts because it still imports heavily from Europe. At present, VW is negotiating with Chinese steel mills to buy steel locally.

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