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Volkswagen''s mulling of China-only brand puts Mercedes and BMW in dilemma

Date:10-16 16:00 Source:autochina.comnews.cn Authour:He Lun

The biggest domino fell after GAC-Honda launched its independent brand. News that Volkswagen plans to develop China-only brands not only puts Mercedes-Benz and BMW into a corner but also threatens to bring down some of China’s homegrown automakers.

Some experts reckon that foreign automakers in China are expected to jack up sales by greatly cutting prices of “JV independent brands” so as to suppress local domestic manufacturers and at the same time ensure profit margins of their own brands. Multinational carmakers are expected to simply redesign some of their old products and badge them into “joint venture brands.”

Such a conjecture may be true for Japanese carmaker Honda Motor. It makes no sense, however, to Volkswagen, now the second largest foreign automaker in China.

I have talked several times in the past four years with senior executives of Volkswagen Group as well as those at Volkswagen Group China about developing JV brands here. I suggested that the auto giant spin off old models such as the Santana, Jetta or Bora and grant them to its joint ventures as JV-owned brands. The move will help Volkswagen shake off the embarrassment of marketing four generations of the same vehicles in China, retain the brand equity, image and German kinship of its newer brands and satisfy the national sentiment of its Chinese partners. I also wrote three articles explaining my points of view. But the answer I received was always the same: Brand building has its own rules. The cost is too high. We won’t consider it. Former Volkswagen Group China CEO Winfried Vahland even agitatedly told me that he was ready to debate with me on the matter all day long!

Finally, Volkswagen decided to give in, obviously due to the unwritten regulations adopted by the National Development and Reform Commission (NDRC). Volkswagen must develop joint venture brands with its partners SAIC and FAW. Otherwise its two new assembly projects, one at Yizheng in Jiangsu Province and the other at Foshan in Guangdong Province, may not be approved. NDRC does not have any written document to such effect for fear of being accused of violating the principle of “national treatment.” But Volkswagen is in no position to debate the powerful State Council commission.

Despite its pivotal position in having two of the three largest local joint ventures in the world’s largest auto market, Volkswagen has been forced to build a low-end JV brand to compete head-on with the country’s own-brand carmakers. Other joint venture companies, unwilling to lag behind, have no choice but to follow the trend.

It seems easier for GM to part with the Sail from the Buick brand and offer it to Shanghai-GM, or develop an electric car brand owned by both partners. But if FAW-Volkswagen and Shanghai-Volkswagen each must have a JV brand, there should be no exception for Beijing-Benz, another Sino-German JV. Otherwise it is unfair. Unfortunately if Beijing-Benz plays the same trick of refurbishing an old model into a new JV brand, the prospect of success will be beyond imagination. The cost would be prohibitively high if the JV tries to develop an all-new “low-end model.” Building a new brand based on the old Smart would also be unthinkable. BMW, the “only manufacturer of premium cars in the world,” will be left in a dilemma – either going against its own brand positioning in order to comply with government regulation or setting an example of special but unfair treatment.

China’s carmakers of own-brands will be most affected in this game. The cost for JVs in rebadging an old foreign model will be very low. This is because local carmakers have already paid up technology transfer fees and there is no need to redevelop the extremely costly chassis and key parts and components. Moreover, multinational carmakers can ignore concerns of its brand image, drastically reduce manufacturing cost of low-end JV brands and contend with the country’s own-brand carmakers.

“The wolf is finally coming.” Think about it: What will happen if Volkswagen reduces the price of half of its two million cars sold in China to under RMB70,000 (US$10,700) apiece and makes inroads into the mid- to low-end vehicle territories of local carmakers?

Of course, it will not be the end of the world. But surely the fight will be cruel, leaving many behind. But if we no longer distinguish between local and foreign carmakers based on a nationalistic perspective, the future prospects of China’s auto market will be clear. The natural law of survival of the fittest will take over. Government intervention, the law of the jungle and market mechanisms will all play a roll.

(Translated by Amanda Zheng based on author’s blog on auto.sohu.com)


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