In China, Volkswagen thinks small to score big

Mon Sep 15, 2014 5:33pm EDT
 
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By Samuel Shen and Kazunori Takada

SHANGHAI (Reuters) - Volkswagen AG's (VOWG_p.DE: Quote) lead in China's compact sedan market this year has helped a handful of German marques sell almost as many passenger cars as China's 25 local brands combined - a trend industry watchers say can only lead to consolidation.

Competitive pricing has made four Volkswagen models China's best-selling compacts, boosting Germany's share of the overall passenger market to 24 percent in July from 21 percent at the end of 2013.

That's now just 6 percentage points shy of brands from Geely Automobile Holdings Ltd (0175.HK: Quote), Great Wall Motor Co Ltd 601633.SS 2333.HK, BYD Co Ltd 002594.SZ 1211.HK and other Chinese auto makers, according to wholesale data from the China Passenger Car Association (CPCA).

The diverging fortunes coincide with a government drive to stifle extravagance among civil servants, which has led to slowing sales of luxury foreign cars and broadening ranges of affordable, high-quality models.

"European brands, especially Volkswagen, have been ferocious in winning market share," said Yale Zhang, managing director of researcher Automotive Foresight. "Chinese brands' biggest woe is losing ground in the compact segment because of the onslaught."

Volkswagen sold 667,688 New Lavida, New Santana and Sagitar compact sedans in China in the first seven months of the year, according to researcher LMC Automotive. That compared with the 147,651 vehicle total of the top three local models - Geely's Emgrand EC7, Great Wall's Voleex C30 and BYD's Surui.

Compact cars account for about 60 percent of passenger vehicle sales in the world's largest auto market, where consumer purchasing power is rising in tandem with rapid economic growth. The segment expanded 15 percent in January-July versus industry growth of 8.1 percent, showed data from CPCA.

"Most Chinese brands won't survive," said analyst Benjamin Lo at Nomura International. Brands from privately run makers such as Geely and Great Wall are most likely to survive because those companies have good management, Lo said.   Continued...

 
Women walk past Volkswagen and Honda cars on display at an automobile market in Beijing, June 17, 2014. REUTERS/Kim Kyung-Hoon