Why You Should Care About Volkswagen's Sales in China

China became the first nation in the world to book more than 20 million vehicle sales in 2013. In this year of record sales, Volkswagen (NASDAQOTH: VLKAY  ) has reclaimed its title as China's biggest foreign automaker from rival General Motors  (NYSE: GM  ) after nine long years. The German auto giant is currently aspiring to become the world's largest automaker by 2018 ahead of GM and Toyota  (NYSE: TM  ) . Let's see how Volkswagen's dominant position on the mainland improves its future prospects, and whether the company be able to sustain this strong performance.

The New Tiguan SUV. Photo credit: Volkswagen Group China.

China's importance can't be stressed enough
Volkswagen generated 30% of its sales from China in 2012, and researcher LMC Automotive estimates that figure could rise to 37% by 2015 . Last year, the company earned 3.7 billion euros -- roughly $5 billion at current exchange rates -- from China alone. 

The carmaker started concentrating in the BRIC region (Brazil, Russia, India, and China) to compensate for the downturn in its German and Western European markets. But sales slipped in all markets other than China in 2013. The company also witnessed a quiet year in the U.S. after the 35% sales growth in 2012.

The chart below gives Volkswagen Group's sales performance in its different markets at the end of the first three quarters of 2013.

Comparative sales at the end of September 2013 (in thousands of units)

Source: Company presentation 

Taking the lead
Volkswagen has the highest market share among foreign automakers in China's premium and passenger vehicle segments. It sold 2.96 million vehicles in the first 11 months of 2013 -- an increase of 17% over 2012. During the same period, archrivals GM and Toyota sold 2.94 million  and 0.81 million  vehicles, respectively. In December, Volkswagen crossed the 3 million mark a week before GM did.

Volkswagen's passenger vehicles have a consolidated 21% market share in China. The namesake VW brand is very popular with the Chinese people, and accounts for 80% of the company's total Chinese sales.  VW's Tiguan ranks among the top-10 best-selling SUVs in China. According to the Chinese Auto Association, the Chinese buyers purchased 168,000 Tiguan SUVs in the first 10 months of 2013, compared to 156,400 units in the previous year.  

Volkswagen's luxury brand Audi occupies nearly 35%  of China's premium market. In 2012 the company sold a record 400,000-plus units of this luxury vehicle in China, while in 2013, more than 440,000 Audis left the showrooms by November's end.  

In comparison, GM's performance has been hurt by its limited presence in both the luxury car and the SUV markets. The Detroit automaker sold 42,717 Cadillacs in China through November 2013,  which is only about one-tenth of the total Audi sales during the same period. In addition, the company is also missing a good small SUV in its lineup.

Japanese automaker Toyota is slowly recovering from the effects of the political backlash between China and Japan, which have marred its sales since the second half of 2012. The company achieved its target of 900,000 vehicle sales in China in 2013, and may even reach 1 million units this year. However, it will continue to trail Volkswagen and GM in the foreseeable future.

Investing in the future
China might be the world's biggest auto market, but there's still room for further growth due to the country's low car density. Volkswagen's management has determined the following car ownership rates in the various categories of Chinese cities.

Category

No. of cities

Average occupancy

Car ownership rates

Level 1

8

14.7 million

123 out of every 1000

Level 2

47

7.6 million

70 out of every 1000

Level 3

167

4 million

30 out of every 1000

Level 4

74

2.3 million

18 out of every 1000

Source: Company presentation 

China's huge growth potential is enticing automakers from around the globe to pour billions into this emerging nation. GM plans to invest $11 billion through 2016, and build four new plants . Toyota has a cautious stance due to the diplomatic tensions, but it's still going ahead with its plan of producing hybrid cars in collaboration with two local automakers. 

But Volkswagen's ambitions dwarf the others. The company proposes to invest 18.2 billion euros, or roughly $25 billion, through 2018  to build five new plants in the southern and western parts of China, which has a higher concentration of level 3 and level 4 cities. The company is looking at a local manufacturing capacity of 4 million units annually.

By 2015, Volkswagen wants to have more than 90 models in its portfolio, and 3,000 dealerships to sell them . In 2012, the company sold 60 models  through 2,054 dealers  . Additionally, the carmaker will also invest heavily in implementing its MQB tool-kit (modular transversal tool-kit) that allows standardization of parts among different models.

Parting thoughts
Volkswagen has worked hard to build its current position in China, and now it's chasing bigger dreams. It wants to build its presence in the level 3 and level 4 cities in order to leverage the next wave of urbanization in the country. It wants to offer more models and increase its market share further. If Volkswagen succeeds in its plans, the company will see some excellent growth and profitability over the coming years.


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