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5 Misinterpretations of the SAIC-Audi Cooperation

Date:12-10 13:20 Authour:He Lun

——Auto Market Hotspots Q&A (112)


I think it is much more likely that SAIC-Audi will design a new sales service network model, which is not only highly efficient and cost-effective, but also able to utilize the excess after-sales maintenance capacity of FAW-VW-Audi dealers. The two networks will create synergy and achieve a win-win result . This will come as a bit of a disappointment to many “experts”.

5 Misinterpretations of the SAIC-Audi Cooperation

The proposed cooperation between SAIC and Audi has become a hot topic in the media. Every journalist is trying to attract the attention of the public by putting forward his or her own interpretation of the issue. It is to be expected that different people will have different opinions, but some statements are clearly basic mistakes and errors of logic. Nevertheless some of them are still gaining widespread traction, even among professionals and the mainstream media, which in a number of cases is quite ridiculous.

Q: It is being suggested that the SAIC-Audi joint venture would violate the government’s industrial policy restriction on the number of joint ventures a foreign auto maker is allowed to establish in China, or the policy that “in principle the government will no longer approve any new traditional ICE vehicle manufacturer”.

A: To avoid infringing the current political guidelines SAIC, as the largest auto maker in China, would never openly challenge the government's industrial policy by setting up a joint venture with Audi producing “similar automobile products”, or establish “a new traditional ICE vehicle manufacturer”. In other words, SAIC and Audi at best can only establish a joint-venture sales company, because the government imposes no restriction on the number of auto sales companies a foreign company can establish. Volkswagen, Toyota, Honda, Nissan, Ford and other mainstream brands all have two or more general agents and sales networks.

Besides, in line with the Anti-Monopoly Law, in order to enhance competition and break the monopoly of sales channels and the price monopoly resulting from brand licensing, over the past two years the government has tended to encourage multi-channel operations for individual brands, and has even released preferential policies for multi-channel parallel imports. The original Measures for the Implementation of Management on Auto Brand Sales were also going to be revised accordingly. And yet those among the media, dealers, and experts who once called for “breaking the monopoly of brand sales channels” are now suddenly opposed to the SAIC-Audi cooperation. How ridiculous!

Q: The SAIC-Audi cooperation will adopt the Skoda model?

A: This is hearsay. It involves the concept of “OEM”, which means that the owner of the product brand that a sales company sells does not have any equity share in the product manufacturer. This is not new – Volvo did not have any share in Chang’an Ford, but Volvo cars produced by Chang’an Ford were sold through the sales network of Volvo’s sales company in China, and Mazda holds 46% of the shares in the FAW-Mazda sales company which sells Mazda cars, but does not have any share in FAW, which produces the cars. Skoda is different – its products are produced by SAIC-VW and sold by the SAIC-VW sales company, but it has no share in either of these companies (though it will probably obtain some equity in SAIC-VW in the future). This time round, Audi is choosing to cooperate with SAIC because it has only 10% of the shares in FAW-VW, and does not very much enjoy its minority interest and limited say in this joint venture. If it simply applies the Skoda model, what would it gain from the new venture?

To be precise, SAIC-Audi will actually apply the FAW-Mazda model; the difference being that Audi will probably have a higher shareholding in the new sales company than Mazda does (46%). It might even reach 50%. This is actually what Skoda desires most.

Q: Are Audi and FAW-VW-Audi the same thing?

A: Of course not. But intentionally or unintentionally, many media representatives seem to confuse the two. If they cannot even distinguish between these two basic entities, how likely is it that any speculation they engage in or conclusions they draw will be right?

Different “Audis” have different interests, requirements, and responsibilities. Audi refers to Audi AG (or the German automobile manufacturer Audi), a minority shareholder holding 10% shares of FAW-VW; Audi China is Audi’s representative organization in China, which is also responsible for certification of some auto parts suppliers and R&D localization of some technologies; FAW-VW-Audi or FAW-Audi refers to FAW-VW-Audi Sales Division, a department under FAW-VW, which is responsible for the sales and branding of locally produced and imported Audi cars in China; FAW-VW-Audi’s dealer network is wholly planned and managed by FAW-VW-Audi Sales Division, and “Audi’s dealers” in the real sense were incorporated into FAW-VW-Audi’s dealer network fully 10 years ago.

One article stated that one third of Audi dealers are redundant as a result of the “Leader Strategy” released by Audi in China in 2013. As a matter of fact, the “Leader Strategy” was developed and released by FAW-VW-Audi Sales Division. I asked the author where he had got the information. He told me it had come from Audi, and that “all the media were repeating it”. In other words, just more hearsay.

Q: Audi’s cooperation with SAIC means it is cheating on FAW, and is immoral?

A: We call a joint venture or cooperation a “marriage” just to add some romance to these business deals. You can’t take it seriously. If you think Audi is immoral to cooperate with SAIC, then which automobile group in China is not “married to two or more wives”? Dealer groups even run several brands. Can we say they are all immoral? And when FAW “married” a mother and son - Volkswagen and Audi (establishing FAW-VW) - and Geely “married” its own subsidiary Volvo (though Volvo Car Asia Pacific), did they cross some forbidden line?

Whoever and how many partners a company decides to cooperate with is a business matter. It is restricted only by policy and laws, like the market access regulation and the anti-monopoly law. In business, there is no such thing as a “moral issue”. This supposed “cheating” or “immorality” is just a loaded expression media like to use to try to generate controversy.

Q: SAIC-Audi is going to establish a dealer network similar to FAW-VW-Audi’s, and these two companies will find themselves in direct competition?

A: Not really. One third of FAW-VW-Audi’s dealers are redundant and suffering losses – why on earth would SAIC-Audi consider that setting up a parallel dealership network would generate a profit? Anyone who thinks this way must be crazy; either that or they seriously need to learn a bit more about how dealer networks operate.

Currently the whole idea of the traditional 4S store model is being questioned and challenged, and dealer networks are facing reform and upgrade. No dealer is at all inclined to establish any more 4S stores right now. Meanwhile, the Tesla sales model, and e-commerce management of sales service networks are beginning to display all their advantages in efficiency and cost effectiveness. In this context, if SAIC were to adopt the traditional sales network instead of something more innovative, it would simply be asking for trouble. How likely is that?

I think it is much more likely that SAIC-Audi will design a new sales service network model, which is not only highly efficient and cost-effective, but also able to utilize the excess after-sales maintenance capacity of FAW-VW-Audi dealers. The two networks will create synergy and achieve a win-win result (see the article How Should Audi Sell Its Cars?). This will come as a bit of a disappointment to many “experts”. 

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