Wolfsburg, we have a problem: how Volkswagen stalled in China

BEIJING, Aug.9 (Reuters) – At the end of December 2019, officials at Volkswagen’s head office (VOWG_p.DE) in Wolfsburg realized they could have a serious problem in China, the company’s largest market and the ticket for its electric future.

Its flagship Passat sedan had gone badly in an unofficial safety test by an insurance industry organization that simulated a driver-side frontal collision, a test that has been widely used in the United States for about a decade.

The car was mutilated. The crash test video has gone viral, garnering millions of views and igniting social media fury across China, where the German auto king’s success is built on his reputation for superior quality and engineering.

Volkswagen didn’t have to do anything – the Passat had passed the Chinese regulator’s frontal crash test, the same test that is used across much of Europe, and which the automaker and many industry experts, better reflects the driving conditions in China.

Nonetheless, Wolfsburg acted quickly, according to two people with first-hand knowledge of the matter. Days after the test results were announced, she assembled a team of dozens of engineers and managers to work with SAIC-Volkswagen, the 50/50 joint venture that makes Passats in China, they said.

In early 2020, this team decided that reinforced metal components should be added to the front of all new Passats and a variety of other models made at the Shanghai-based company, at a cost of around 400 yuan ($ 62) per vehicle, according to sources.

The structural change, details of which were not previously released, would amount to tens of millions of dollars for the hundreds of thousands of vehicles that would be affected by the company each year, the sources said. It was a significant cost for a company that had said it was trying to cut manufacturing costs in China and around the world.

The intervention in the face of online consumer activism underscores the importance of China, the world’s largest auto market, and on which Volkswagen is relying to fund its € 35 billion ($ 42 billion ) towards electric vehicles and keep its commitment. overtake Tesla Inc (TSLA.O) to become the world leader in electric vehicles by 2025.

The costly renunciation of global auto makers from oil comes at a time when they can no longer count on the dominance they have enjoyed over decades in China, where they are feeling the warmth of local gasoline and oil players. electricity challenging them on technology and design.

A Volkswagen spokesperson said it developed products specifically for the Chinese market and that the failed Passat test simulated a head-on collision between two cars, a scenario he said was less likely in China than in the States. -United.

“In China, there are central barriers on highways,” Volkswagen added. “In China, there aren’t normally as many trucks or vans as the traffic scenarios in the United States.”

Asked about the 400 yuan change, the spokesperson said that Volkswagen is constantly improving its products based on customer feedback and to make them safer.

“THE GREATEST IMPORTANCE FOR THE HEALTH OF VW”

It is difficult to compare the designs of Passats in Volkswagen’s markets, as they are often fundamentally different vehicles built on different production platforms.

The new Passat in China was the first model to have such a structural change when it rolled out in mid-2020, according to the sources. It passed the insurance industry test that its predecessor failed.

But the damage to reputation and finances proved more persistent for Volkswagen, which was China’s top-selling foreign automaker and made largely healthy profits in its three decades there, the longest in China. all foreign players.

Volkswagen’s profit per vehicle in the country has fallen from 1,400 to 1,500 euros around 2015 to around 1,000 euros and even closer to 800 euros in recent quarters, according to analysts at Bernstein who described China as ” of utmost importance to the financial health of VW “. .

Sales of the Passat, and more broadly of the company with SAIC Motor (600104.SS), slumped – something Volkswagen attributed mainly to backlash from the failed crash test, as well as product line issues. and a worldwide shortage of chips.

As a sign of the financial pressures facing the industry, an internal memo, seen by Reuters, showed that SAIC-Volkswagen’s finance team had ordered officials to cut workshop costs by 30% in 2019, compared to the year before, when car sales in China first fell since the 1990s.

Volkswagen declined to comment on Bernstein’s profitability figures or the internal memo.

SAIC-Volkswagen’s revenue fell 26% to 174.5 billion yuan last year from 2019, while profits fell 23% to 31 billion yuan. Sales of the Passat, once one of the best-selling sedans in its class before the insurance agency’s test, fell 32% to 145,805 vehicles, according to consulting firm LMC Automotive.

While the COVID-19 pandemic clearly played a significant role, the business decline was much larger than the overall 6.8% drop in passenger vehicle sales in China during the same period. according to data from the China Passenger Car Association.

Moreover, Volkswagen’s other main company in the country, along with local automaker FAW – whose products were not involved in the crash test controversy – saw sales increase 1.5%, although that VW officials say they have gained momentum by introducing premium Audi SUVs and models to the market.

The two joint ventures make up the bulk of Volkswagen’s Chinese business, accounting for all of its local production. They have historically been close in number of vehicles sold, although FAW has taken the lead in recent years.

There was no respite for SAIC-Volkswagen in 2021, with sales down 7.8% in the first six months compared to a year earlier when the pandemic raged. FAW-Volkswagen saw sales increase 23% while overall Chinese passenger car sales jumped about 29%.

FRACTURED ‘A-PILLAR’ CRASH TEST

The C-IASI test that the Passat initially failed in 2019 was developed by a Chinese insurance industry body, the CIRI Auto Technology Institute, which was not satisfied with the standard C-NCAP test performed by CATARC, an agency government-backed vehicle testing.

He said many insurers felt that C-NCAP failed to distinguish vehicles sufficiently in terms of crash safety and started publishing test results in 2018.

Most foreign car brands have received positive results in the C-IASI test, although even those that did poorly did not receive the online backlash that was aimed at the Passat.

The C-IASI test subjects 25% of the front of the car to a frontal impact. It fractured the front roof rack on the driver’s side of the Passat, known as the A-pillar.

The standard C-NCAP test reaches 40% of the front of the car, which helps to absorb the impact better.

CIRI and CATARC did not respond to requests for comment.

In the United States, a 25% frontal impact test is used by the Insurance Institute for Highway Safety (IIHS), a nonprofit group funded by auto insurers. IIHS tests are widely publicized, and automakers design vehicles to pass them as well as federal crash tests.

Volkswagen China chief Stephan Woellenstein admitted in January that the failure of the crash test and the online reaction that followed triggered the decline in Passat and SAIC sales.

Last month, however, he said Volkswagen had fixed the problems revealed by the test, the ructions from the episode had subsided and the automaker’s Chinese business was picking up.

“We have again clearly one of the safest cars on the market in this segment,” Woellenstein told reporters in July. “We will take over the old direction of the Passat again.”

But there is still some ground to regain in the segment of large wagons.

A total of 47,480 Passats were sold in the first six months of this year in China, far behind the 91,110 Toyota Camrys (7203.T) and 89,157 Honda Accord (7267.T), according to LMC.

Figures from the same period of 2019, before the pandemic hit, show how much the Volkswagen model has collapsed in recent times: 91,400 Passats were sold against 111,968 Accord and 85,396 Camry.

($ 1 = 6.4610 yuan Chinese renminbi; $ 1 = 0.8423 euros)

Reporting by Yilei Sun and Tony Munroe; Additional reporting by Jan Schwartz and Christoph Steitz; Editing by Joe White and Pravin Char

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