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Why Volkswagen is betting on China

I was in Wolfsburg earlier this week to attend the annual media conferences for the Volkswagen Group as well as its namesake brand (see SPOTLIGHT: China, software, electromobility, shareholding and the future of Volkswagen).

China became the top narrative as Dr. Herbert Diess, in his first appearance at the event as Group CEO since being thrusted into the top position less than a year ago, fielded numerous questions from the European media and yours truly on China.

No surprise, China is the biggest market for the Group as well as its Volkswagen, Audi, Škoda and Porsche brands.

The biggest news out of the event as far as China is concerned was obviously his response that Volkswagen Group is considering to possibly raise equity stakes at its three joint ventures with FAW, SAIC and JAC, a plan that Dr. Diess confirmed at a follow up interview with the Chinese media. It’s the first time that a CEO of a major global automaker has openly revealed the intent to do so since BMW Group announced its intention last October to raise its stake in its BMW-Brilliance JV to 75 percent, a move that has since received shareholder approval from Chinese partner Brilliance China.

Then there was the bold comment that “Volkswagen’s future will be determined in China,” a position that Dr. Diess has held ever since he personally took the responsibility of overseeing the China business since the beginning of the year, in addition to being also the CEO of the Volkswagen brand.

China is an important market for any foreign automaker, there is no doubt about that. But no other CEO of a major global automaker has viewed the importance of the Chinse market as huge as Dr. Diess has.

So why is Volkswagen betting on China?

Dr. Diess partially gave the answer to that question when he commented that “China in some areas of the automotive development will be assuming a leading role because it’s a huge market, it continues to grow, has the growth potential, the Chinese are very innovation friendly, they embrace innovation happily, they have been taking the lead in mobile communication systems, in payment systems.”

Which means, what happens in China will dictate what will happen in the rest of the world, an “In China, for the world” mentality that is being increasingly adopted by foreign automakers and suppliers, and openly embraced by Dr. Diess.

And China will account for a majority of the 22 million electric vehicles that Volkswagen Group plans to produce worldwide by 2028. If we do a simple extrapolation based on the 400,000 and 1.5 million units in new energy vehicle sales in China in 2020 and 2025 already announced by the company, China could account for as many as 10 million units out of those 22 million. For it to be successful globally, obviously it cannot afford to fail in China on electromobility.

And if we talk about profitability, having the €4.6 billion its Chinese JVs earned last year accounted for equity reflected as part of the Group’s operating profit would obviously be much nicer once it does become a majority shareholder in those JVs. How it will sort out of its relationship with its Chinese partners in dealing with the sensitive nature of the move, is another question.

The bet is on, the “supertanker is picking up speed,” as Dr. Diess said. And there is no turning back.

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