FAW-VW Audi dealers have recently founded a dealer association and issued a statement saying that after achieving the sales target of 1 million Audi cars by 2020, they will not object to Audi having a new partner in China (namely SAIC). They are also requiring that Audi “provide a reasonable solution” to the ¥28 billion ($4.07 billion) loss suffered by FAW-VW Audi dealers arising from network construction over the past three years. This has once again brought the SAIC-Audi cooperation and the serious losses of FAW-VW Audi dealers to the forefront of the auto field.
This statement raises more questions than it has cleared up, and these questions are much more important. For example, they will raise no objection if they complete the 1 million sales target by 2020; does this mean that they will object if they complete the target in 2021 or later? We know the causes for their great losses – the 1 million sales target, the planned network of 580 dealerships, the dealer business policy etc., but who developed, approved and executed them and who is mainly responsible? How much say do Audi AG and Audi China have in these decisions? As a small shareholder who holds only 10 percent of the shares in FAW-VW, how much say does Audi AG have in deciding whether to compensate the dealers and how much should it be? After weighing the pros and cons, will Audi AG, Volkswagen AG and FAW be more willing to compensate the dealers, or more likely to reject their demands? It is believed in the industry that each of the three German luxury brands have their own ways of marketing in China – for Audi, the Chinese side basically controls the marketing; for Mercedes-Benz, the foreign side has a little more dominant power; and for BMW, the foreign side has the dominant power. Now, will this pattern be rewritten?
In fact, there are more and deeper problems beyond the above. Some may never be known to the outside world, some may be revealed later, some can be figured out by using business logic and Chinese logic, and there are also some that dealers are definitely aware of but would rather keep vague to achieve their own purposes. But one thing is for sure – a lot of problems are not as simple as some media have portrayed and the real answers will be quite different, because they haven’t even figured out who are the stakeholders, what are their relationships, and who play the main roles in those exchanges.
The biggest question lies in how much compensation will be given to dealers. This depends on the loss figure stakeholders will agree to recognize, and also on the will and the financial capabilities of Audi, Volkswagen and FAW.
Some media say this statement has “sentenced SAIC-Audi to death.” It’s a little too early to say that. First of all, the Audi dealer association is not a court, so this statement does not have any legal effect. Fundamentally, it is just a demand or a strategy used by FAW-VW Audi dealers to make things difficult for Audi and attract attention, so that they will have more leverage or an advantage in the negotiations on loss compensation. Second, the statement only requires postponing the SAIC-Audi cooperation rather than raising an unconditional objection. Besides, Audi and SAIC, as the parties concerned, have so far said nothing. And yet the dealer association can just blow it with a statement? How ridiculous is that? At least it should be Audi and SAIC’s call.
The dealers will probably not get full-amount compensation for their ¥28 billion loss. That loss is just one side of the story told by the dealers to raise the stakes – a pretty basic negotiation strategy. The number itself is far from accurate. For example, at the end of 2014 BMW dealers almost turned the car maker upside down just to claim a rebate of ¥6 billion, but Audi dealers did not make a sound when they suffered losses of ¥6.5 billion and ¥9.5 billion respectively in 2014 and 2015. So what happened then? And as for exactly how much loss they have suffered, and which part is on the manufacturer and which is on the dealers, in this big data era it shouldn’t be too difficult to find out.
The biggest question lies in how much compensation will be given to dealers. This depends on what loss figure stakeholders will agree to recognize, and also on the will and the financial capabilities of Audi, Volkswagen and FAW. In terms of financial capabilities, Audi and Volkswagen have good profitability, but are financially strained due to the emissions scandal. FAW is aiming for a listing as a whole, so having good profitability is its top priority, and in addition, it has to provide financial support to its own local brands. So each shareholder has its own difficulties, and the answer to this question will be the result of their will and their long-game strategies.
It’s true that FAW has a wealth of talent, great strengths and plenty of resources, but it also faces historical burdens and current problems. While trying to be politically correct, it also has to work on the overall listing and compete in the market. Under this unprecedented pressure, how much confidence does FAW still have in solving the Audi issue quickly? And after encountering some difficulties in the cooperation with SAIC, how much patience and time does Audi still have to wait for FAW to get its own affairs straight and then work with FAW to overcome the huge challenge ahead with every possible means?
Dealers are reportedly refusing to purchase imported cars to force Audi to accept the statement, which means Audi is definitely in a dilemma. What choice it finally makes will depend not only on the decision maker’s boldness and wisdom, but also on the attitude of SAIC and FAW.
But the more important question is – even if the SAIC-Audi cooperation is further suspended or even cancelled, will it solve the problem of the FAW-VW Audi dealers’ huge losses and keep them sustainable? Will Audi really be willing to work with FAW and make it thrive again as a cash cow?
As a matter of fact, the fundamental question – why Audi is seeking cooperation with SAIC – has never been clearly answered. “To sell more cars and make more profit” or “SAIC approached Audi first” are either nonsensical or superficial. Deep down, it’s because there are some serious problems in the cooperation between Audi and FAW, and so far the two sides haven’t been able to solve them, forcing Audi to make such a choice. If you know what has been going on in FAW in terms of personnel changes and management systems in the past two years, if you understand Audi’s current challenges in brand premium and sales in the Chinese luxury car market, and if you know which side is controlling the marketing system of FAW-VW Audi, you will know what the problems are, and you will also know why they won’t repeat them aloud.
Although it is one of the most important stakeholders, FAW has said nothing about it, indicating that it finds it really hard to be open on the subject. And before Audi and SAIC started the negotiations, FAW was “notified of relevant information” but did not stop them, which was also probably for the same reasons.
It’s true that FAW has a wealth of talent, great strengths and plenty of resources, but it is also faced with historical burdens and current problems. While trying to be politically correct, it also has to work on the overall listing and compete in the market. Under this unprecedented pressure, how much confidence does FAW still have in solving the Audi issue quickly? And after encountering difficulties in the cooperation with SAIC, how much patience and time does Audi still have to wait for FAW to get its own affairs in order and then work with it to overcome the huge challenge ahead with every possible way?
If the answer is uncertain or even negative, then this will be a negative-sum game where Audi, FAW and the dealers will all lose. On the other hand, the SAIC-Audi cooperation is a nice-to-have for SAIC. If it falls through, SAIC will feel a little unhappy for a moment, but in terms of long-term interests, it will suffer no great loss
Indeed, FAW-VW did a great job in operating the Volkswagen brand, but that’s because Volkswagen and Audi are facing totally different problems and challenges:
First, Volkswagen is a leading mid-range brand, and has great strengths in sales, while Audi is a leader in sales, but has never had much strength as a brand. Especially since it lost its noble status as the “official car,” it has had to make great efforts and use all its resources to rebuild its brand image. But in the process, the two other German rivals are catching up thanks to their great brand strength.
Second, holding only 10 percent of the shares in FAW-VW, Audi has really limited say in everything and gains a very small share of the profit, so there must be some level of discontent. It’s just that this was not so obvious in the times when Audi reigned over the luxury car market, but now, with everything changing so much in recent years, the stresses are starting to show.
Third, Volkswagen AG, its import car sales company, FAW-VW and SAIC-VW are each doing their own job in running the Volkswagen brand, but as long as they don’t screw up they can always support each other and achieve synergy. However, for Audi, since the Audi import car sales network was incorporated into the FAW-VW network, the FAW-VW Audi Sales Division has been gradually taking over all of Audi’s brand building and sales work in China. In all these years, even when the Chinese media attended Audi’s global events, everything was arranged by FAW-VW Audi, and Audi China was just a supporting role and executor, not to mention in those domestic marketing campaigns. Audi’s Chinese press releases to the world are also controlled by FAW-VW Audi. Now if we look at Volkswagen China and even Škoda China, we will see they are much more active and have more control in this area.
The thing is, FAW-VW Audi Sales Division is believed to be the controller, but the brand belongs to the foreign side. Regarding specific strategies like how to build the brand and whether to focus on the sales or the brand, there is significant disagreement between the senior management on the two sides due to different values and cultural backgrounds, and a gap in understanding of Chinese market needs and competition. But in the end they have to make a decision and Audi will not be too happy because it doesn’t have enough say and influence. With regard to the second problem, today this kind of challenge is more apparent in the new situation.
If FAW and Audi had established a JV sales company at 50:50 shareholding a long time ago, perhaps there would not be any cooperation between SAIC and Audi today, and dealers would not have had to suffer such huge losses. This is not an afterthought.
Now it may be a little late for FAW and Audi to talk about establishing a JV sales company, but it’s better late than never.
However, the SAIC-Audi cooperation has already begun. If it falls through just because FAW and Audi are going to establish a JV sales company, what is SAIC to Audi? A playing card that Audi has used to force FAW to set up a JV sales company? If that is the case, Audi’s leadership will be seriously questioned, and Audi itself will also lose its reputation as a world-renowned luxury car brand. But on the other hand, Audi cannot turn a blind eye to the strong demands from the dealers. For starters, it has to solve the most immediate problem – the ¥28 billion loss – and at the same time win approval from FAW and even Volkswagen. So now Audi really is in a dilemma.
When Volkswagen decided to work with FAW, SAIC was very unhappy about it. Over the years, these two joint ventures have fought hard with each other, but in the end the two have become top car makers in China. They are the biggest taxpayers and money makers in the Chinese auto industry, and Volkswagen is firmly in the lead in the Chinese passenger car market. In 2016 alone, sales were up to almost 4 million vehicles. So instead of hurting each other, the Chinese shareholders of both the two joint ventures and their dealers have really earned large profits (with the exception of the Audi dealers in the past 3 years).
If Volkswagen hadn’t established a joint venture with FAW at that time, it would not be so strong in the Chinese market, and SAIC-VW would not be much stronger than it is today. In other words, if the two joint ventures hadn’t fought so hard for vehicle models, Volkswagen would not have had enough models to cover almost every market segment, as it does today, and would not have developed those “legendary” models specially made for the Chinese market.
Now that Audi has encountered its bottleneck in development and is trying to break it by working with SAIC, it should be a common business move. Audi did not expect things to become mired in the huge losses of the FAW-VW Audi dealers. Now with the media adding fuel to the flames, things seem to have gotten so much more difficult and complicated.
Looking at this cooperation objectively and rationally, if this SAIC-Audi tie-up really works out, it will definitely bring pressure on FAW-VW Audi and FAW, but in the long run, it will also encourage FAW-VW Audi and SAIC-Audi to fight harder. And for the sake of its own interests and its overall China strategies, Audi, as the owner of the brand and technologies, will never let this fight become a dog-eat-dog competition and will try everything it can to allocate its limited resources between the two partners in an effective and balanced manner, including finding a way to make the FAW-VW Audi dealer network and the SAIC-Audi sales network complement each other.
From FAW’s perspective, with its own strengths and resources, and especially the strong system formed by FAW-VW Audi in the past 20 years, it should be confident enough to gain the upper hand in the competition with SAIC-Audi, and in the process it can grab more market share together with SAIC-Audi to achieve the same kind of synergy as FAW-VW and SAIC-VW and gain substantial profit. At the same time, the dealers’ problems will also be solved. So this is going to be a win-win game.
And if the SAIC-Audi cooperation is blown out, how much longer can FAW-VW Audi withstand the pressure and maintain its momentum? And even if the dealers get compensation, how sure are they to make profits in the future?
(Edited based on original article on autochina.comnews.cn)