Ripples of emissions scandal felt in China

Nikkei Asian Review, October 1, 2015

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The U.S. limits nitrogen oxide emissions to half the amount allowed in Japan and Europe. © Reuters

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SHANGHAI/BEIJING — On the face of it, Volkswagen’s diesel scandal should have little impact in China, the company’s largest market, as none of the models involved are sold in the country. However, the German manufacturer, which through its joint ventures with local automakers SAIC Motor and FAW Group has seemed to be able to sell anything with a VW badge, may be facing a profound change in attitudes among Chinese consumers.

     Last year, the Volkswagen Group sold 3.68 million cars in China, accounting for a market-leading 15.7% of sales in the country. Since VW established its first joint venture with SAIC in 1984, the company has sold few diesel vehicles in China. FAW-Volkswagen put out a statement Sept. 24 saying that none of the models being investigated by U.S. authorities have been sold in China.

Diesel plan denied

In 2013, VW raised the idea of introducing new diesel models — of the type involved in the current scandal — to China. “Bosch and VW have lobbied the Chinese government to adopt diesel technology to absorb the extra diesel engine and parts production capacity in the EU, but after this event, diesel will not be an option for future fuel efficiency,” said Zhou Jingzhe, director for China and Korea at IHS Automotive Advisory Service.

“The belief that German cars are the most technologically advanced in the world has been damaged,” said a VW salesperson in Beijing. “We are going to have a hard time from now on.”

FAW-Volkswagen sales tumbled 14% on the year in the year to Aug. 31. “We may well need to re-revise our sales target downward for this year,” said an official at one of VW’s joint ventures.

“I had already decided not to buy [another] Volkswagen before this news,” said Jimmy He, a Chengdu-based businessman who previously bought a VW Tiguan SUV. “Different models of Volkswagens are quite similar in design and are quite ordinary.”

     “The immediate impact [of the rigged emissions tests] on sales in China may be limited, but questions may have been raised in the eyes of consumers with regard to their perception of the trustworthiness of the VW brand,” said Bill Russo, who previously oversaw Chrysler sales in China and is now a managing director at Gao Feng Advisory in Shanghai.

The online buzz has been very critical. “They must be underestimating Chinese consumers,” said one commenter. Said another: “Volkswagen has been my favorite brand of car, but now I’m disappointed. From now on, I’ll buy Chinese or Japanese cars.” Another person wrote, “It turns out that German companies are just as untrustworthy as Chinese companies.”

Under the microscope

Sources at VW’s Chinese joint venture partners say they are already receiving inquiries from government officials regarding emissions and other quality measures. “If they discover any flaws or misconduct at such a global company as VW, it would give them a huge career boost,” said one executive. “Our fear is that those government officials will intensify their scrutiny.”

Another potential threat comes from investigative reports by state-controlled media, such as China Central Television, which in March highlighted a problem with VW’s automatic dual-clutch gearboxes two years ago and other issues regarding the carmaker.

“Of course [the new scandal] will remind Chinese consumers of the [dual-clutch gearbox] and axle problems,” said Jochen Siebert, managing director of JSC Automotive, a China-focused consultancy. “[But] so far, VW has managed to get over these problems, and this time won’t be different. I believe that China and the Chinese have bigger fish to fry and will get on with their lives and other topics, so it will not have a lasting impact in China.”

     But the scandal could trigger a shift in perceptions among Chinese consumers. They have tended to favor German cars, believing them to be better than U.S. and Japanese models. “Due to the arrogance and cheating with diesels, VW is stepping down from the altar,” Zhou said.