Growth and change: The Chinese car market remains the largest in the world, and China is also assuming a leading role in e-mobility and digitalization – with the Volkswagen Group as a strong partner.
The year of the boar, which begins in China on the night of 5 February, promises luck and wealth according to traditional symbolism - just right for the car market of the country, which after a long boom phase can use some luck just well. For some time now China has been the world’s fastest growing market for cars. In the decade from 2008 to 2017 alone, sales of passenger cars more than quadrupled from nearly 5.5 to around 23.9 million. The steep growth rate was checked in 2018, when year-end figures showed a drop of four and a half percent. This is due to the slight overall decline in China’s economic growth, which experts ascribe to factors such as trade disputes with the US. But even with only 22.75 million cars sold by the end of last year, China was still the largest of all the world’s major car markets.
The Volkswagen Group was able to counter this downward trend by raising its own passenger car sales in China to a new record number of 4.21 million in 2018, which represents an increase of 0.5 percent over the preceding year. With a share of 18.5 percent, Volkswagen, together with its local partners, remains the market leader in China– with a significantly better delivery result than the overall market. In sum, 2018 was a challenging but successful year for Volkswagen.
In these rather turbulent times, 2019 has begun with a turning point for the Group’s activities in the Middle Kingdom. Jochem Heizmann, member of the board of management responsible for China and long-serving CEO of Volkswagen Group China, left his post in January. Heizmann had directed the Group’s work in the country since 2012. Under his watch, deliveries increased by almost 1.5 million vehicles, the number of production sites increased to more than 30, the number of employees to more than 100,000 and a network of partners was created in the fields of digitalization, connectivity and mobility services.
To bid farewell to Jochem Heizmann and to hold talks with employees and partners, Group CEO Herbert Diess traveled to Beijing at the beginning of the year. It was both a pleasure and an honor to personally take leave from Heizmann and to honor his service, said Diess. Even more important than the impressive numbers was how Heizmann guided the transformation process for the Chinese automotive industry and opened Volkswagen China to new ideas. He is the individual most responsible for the firmly anchored position Volkswagen enjoys in Chinese society today, said Diess.
China market summary
China’s passenger car market, impacted by a challenging second half, took a back seat last year following two decades of uninterrupted growth, falling by 4.6 per cent last year. Nevertheless, the market remains the world’s automotive powerhouse, with younger than average car buyers helping, Chinese passenger car sales remained above the 22.7 million annual sales level last year, comfortably seeing Asia’s largest economy retain its leading position as the world’s largest passenger car market, having held that position for more than half a decade. China has an automotive market that is partly shaped by state incentives and regulations - limiting license plate registrations in Chinese mega cities for example.
As electric cars are not being subject to the same restrictions, it has consequentially helped boost demand for these vehicles and led to China becoming the world’s largest market for pure electric passenger cars. Last year, just over three quarters of a million pure electric passenger cars were registered. With the addition of 247,000 plug-in hybrid electric vehicles (PHEV), it made the NEV (New Energy Vehicle) balance surpass one million units for the first time. An almost doubling in size within one year.
Despite China’s leading position when it comes to electric cars, these volumes remain dwarfed by the might of the SUV/Crossover segment. The global trend for these vehicles where occupants sit higher than traditional vehicles, has by no means passed China by. Last year this sector once again accounted for over 40 per cent of the passenger cars newly registered on China’s roads. The Volkswagen brand together with its joint ventures was no exception to this trend with its SUV models, including the exclusively available in China; Teramount, Tharu and Tayron models, finding narrowly under half a million new customers - which is more than the combined passenger cars sales in The Netherlands last year. The Volkswagen brand SUV portfolio is due to expand to twelve models by next year. Volkswagen however remains strongest in the traditional sedan segment, still attracting the majority of its Chinese sales. Many of these models, exclusively available in China, come with rear legroom in abundance thanks to long-wheelbases. Volkswagen’s Phideon, limited to the Chinese market, measures over five meters in length and among other things, features an Active Info Display offering a chauffeur mode allowing passengers to send messages to the driver. Over 25,000 - of this MLB (Modular Longitudinal Matrix) based model, produced by SAIC Volkswagen - were registered last year. In terms of premium brand vehicles, China remained the largest market worldwide, with Audi retaining its position as the leading premium car sales brand. Last year, the brand with the four rings launched its smallest SUV/Crossover, Q2, with a long-wheelbase version, tailored specifically for Chinese customers. It will be joined imminently by the Audi Q2 L e-tron, the first locally produced electric car from Audi, setting an important milestone for the brand’s electrification strategy. The imported e-tron, manufactured in Brussels, will also begin hitting Chinese streets later this year.
The Volkswagen brand, with its local partners FAW Volkswagen and SAIC-Volkswagen, maintained its position as the clear number one choice for Chinese buyers last year, led by its Jetta model with over 325,000 sales last year. In what has become its second home market, Volkswagen’s success can partially be attributed to its strong locally aligned product emphasis. Its long-established production network began operations over 35 years ago. Despite this successful localized strategy, Volkswagen is determined to become even more Chinese going forward. Volkswagen Group accounted for over 18 per cent of the market, or over 4.2 million annual sales last year in Mainland China and Hong Kong, while the Volkswagen brand accounted for roughly three-in-four of those sales with just over three million sales. Audi’s sales increased more than fivefold over the past ten years accounting for 663,000 sales last year helped by high demand for the locally produced A4 L (long-wheelbase) model. ŠKODA and Porsche can also both lay claim to China being their single largest individual market, both recording record sales last year.
An increase in the e-mobility segment is likely to accelerate due to the fact that the Chinese government is setting targets. Fleet average fuel efficiency targets, ranging from five liters per 100 kilometers in 2020, dropping to four liters per 100 kilometers in 2025 will only become achievable with a mix of e-mobility vehicles. In order to further promote electric mobility, a quota for e-vehicles has been in force since this year. Starting in 2019, manufacturers selling more than 30,000 cars a year in China will have to meet an electric quota for ten percent of their cars. A so-called credit point must then be proven for each of these quota cars. Fully electric vehicles receive three to five points depending on their range, plug-in hybrids two points.
Following on from the Chinese e-Golf launch last year, Volkswagen Group will bring almost 30 NEVs to market by 2020, half of them locally produced. In 2025, a total of around 1.5 million zero emission cars are planned to be delivered to customers. The localized MEB (Modular E-Drive Kit) to be produced in Anting, beginning in 2020, right after the worldwide start in Zwickau, Germany, will help to reach this ambitious goal. With no indications of a pause for breath in China’s electric car market, the challenge of keeping the pace of infrastructure up to accommodate these vehicles remains. Ten billion euros will be spent by Volkswagen and its Chinese joint ventures on the industrialization of e-mobility until 2025. A further step by the Group will be incorporating all of the brands under one physical location in Beijing – the new office building will allow communications and knowledge sharing to accelerate. This will contribute to the transformation process underway seeing China becoming a core global research and development hub in its own right. In parallel, while placing more emphasis on local bespoke products and services - becoming more Chinese - the Group will see the Chinese operation go from local-to-global. Volkswagen is currently already developing an innovative Human Machine Interface together with the leading Chinese AI-company Mobvoi and expanding into a ride-hailing and car-sharing partnership with Chinese partner Shouqi. In the first phase of the cooperation with DiDi, Volkswagen Group China wants to examine potential partnerships in mobility, smart city or robo taxi projects.
China is the new center of power
Strategic directorship of business in China now lies in the hands of Group CEO Diess himself. Stephan Wöllenstein, who heads the Volkswagen brand in China, will follow in Heizmann’s footsteps and manage operations as Volkswagen Group China’s CEO. “The future of Volkswagen will be decided on the Chinese market,” says Diess. The automotive industry is going through a fundamental process of transformation in which China is now setting the pace with respect to e-mobility and autonomous and networked driving. “China is the new center of power in the automotive industry,” says Diess.
The Chinese market is a special one for automotive corporations in several respects – not only for its size and rapid growth. Government incentives and regulations play a role in controlling sales. For example, in 2015 the Chinese authorities temporarily cut taxes in half on cars with displacements of up to 1.6 liters in order to stimulate sales for this class of vehicle. Another means of controlling sales consists of issuing licenses for vehicle registration plates, which limits registrations of new cars with combustion engines.
Among the German carmakers, the Volkswagen Group has been a trailblazer on the Chinese market. It founded its first joint venture, Shanghai Automotive, back in 1984. Now known as SAIC VOLKSWAGEN, the company was one of China’s largest carmakers in 2018 with around two million vehicles delivered. The Lavida* is the top model with around 460,000 cars sold. It is followed by the Tiguan, of which nearly 280,000, including the Tiguan L, hit the road last year.
In third place is the Santana (270,000 cars sold), which marked the start of Volkswagen’s activities in China in April of 1983. The first car was assembled in Shanghai back then, even before the joint venture contract was signed the following year. The Santana was originally based on the Passat, but now is its own model developed for the Chinese market and mainly built in Yizheng.
SAIC VOLKSWAGEN produces and sells Volkswagen (e.g. Polo, Touran, Passat) and ŠKODA (e.g. Fabia, Superb, Kodiaq among others) brand models. Additionally, to these models, come vehicles purposefully designed for China such as the Teramont SUV and the Phideon luxury sedan, which came onto the market in October 2016.
Demand for SUVs continues to grow
Along with other new developments, the Teramont and Phideon reflect the major trends on the Chinese car market. The Teramont answers the growing demand for SUV-class vehicles that offer spacious interiors and exceptional driving comfort. Around four in ten newly registered cars in China are currently SUVs, and that figure is rising. The Volkswagen brand alone will have more than ten models on the SUV market by 2020. The year 2018 saw the launch of the Tharu, Tayron, Touareg and T-Roc.
A second major development is China’s role as the world’s trendsetter and largest market for e-mobility. According to the CAM Institute in Bergisch-Gladbach, China alone accounted for 60 percent of worldwide demand for electric cars and plug-in hybrids in 2018. Around one million passenger cars with electric drives found buyers in the country. That figure is expected to rise by 50 percent in 2019. The Volkswagen Group wants to lead this trend with a model campaign. By 2020 the Group’s brands seek to bring 30 new fully electric and hybrid vehicles onto the Chinese market. By 2025 sales of electric models should reach 1.5 million units. To achieve this impressive aim, the Group’s third joint venture in China, JAC Volkswagen, was founded in 2017 for the sole purpose of developing and producing electric cars.
Quota for electric vehicles
Growth in the field of electric mobility is also fueled by the attention the Chinese government is giving. By 2020 the fleet average fuel consumption is supposed to lie at five liters per 100 kilometers, and by 2025 consumption should drop to four liters. Fleets can only meet these targets if they have a high percentage of electric vehicles. To further advance e-mobility, an electric car quota was introduced. As of 2019, manufacturers that sell more than 30,000 cars a year in China must ensure that ten percent of them are electric. All cars in the quota category receive credit points. All-electric vehicles receive three to five points depending on their range, and plug-in hybrids receive two. China is also loosening its rules for foreign automotive corporations. Since 2018, manufacturers of electric passenger cars have been permitted to act independently on the Chinese market.
High-speed Internet, AI-supported infotainment and other digital tools mark the third major trend among drivers in China, namely a high demand for digitalization and connectivity-related features in their cars. A study by the McKinsey consultancy showed that in-car connectivity is a make-or-break factor in purchasing decisions for thirty percent of customers. A fourth and long-standing trend reflects the need for all seats in a vehicle to be both roomy and comfortable. Customers prefer models with large wheelbases: the above-mentioned Phideon boasts a length of 5.07 meters and a wheelbase of slightly more than three meters.
Three new factories
The Audi Group brand has also consolidated its activities in China into a joint venture. Founded in 1991, FAW-Volkswagen is headquartered in Changchun. FAW produces high numbers of the successful Jetta, Sagitar and Magotan models, but has also been making Audi brand cars since the mid-1990s. Its highest-selling model is the Jetta with more than 325,000 units sold. Like SAIC VOLKSWAGEN, FAW also runs its own component factories. To keep up with demand for both SUVs and – no less importantly – electric cars on the Chinese market, FAW-Volkswagen opened three new factories in 2018, one each in Qingdao, Foshan and Tianjin.
In Qingdao, cars with combustion engines and electric drives can be made on the same production line. The Foshan factory will be another center of SUV production for both Volkswagen and Audi brand models. Electric vehicles based on the MQB platform will be made there as well, and plans also call for the factory to assemble cars based on the MEB platform, the new Modular Electric Toolkit for purely battery-run vehicles. The factory in Tianjin is tasked with producing high numbers of new models from FAW-Volkswagen, especially SUVs.
Pioneer in future-oriented technologies
Despite the decline in 2018, China remains THE growth market for the automotive industry. A look at the country’s passenger-car density makes this clear. Only around 134 of every 1,000 inhabitants own a car. That figure is 864 for the US, and 553 for Germany (figures for 2017). At the same time, China is becoming a pioneer in developing new drivetrain technologies as well as autonomous driving and digital mobility solutions. “China will make a crucial contribution to the world’s leading mobility technologies and products,” said Herbert Diess at the farewell ceremony for Jochem Heizmann. Volkswagen is therefore determined to develop technologies and mobility strategies with its partners in the Chinese automotive sector and in the tech industry – “in China, for China and for global markets.”
* All the vehicles named in this text are built for the Chinese market and are therefore not subject to Directive 1999/94/EC.