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Is Volkswagen’s Image Secure In China

September 12, 2014 | About:

Just a week back, I had written an article which spoke on Volkswagen’s (VLKAY) growing strength in China, vis-à-vis its immediate rival Toyota (NYSE:TM). While Volkswagen was reporting improvement in passenger vehicle sales in China, Toyota was seeing a gradual pull back on the sales numbers in the nation. But the recent news on the imposition of penalties on the former by the Chinese anti-monopoly regulator has thrown up the biggest question on the survival of Volkswagen in China. Let’s take a sneak peek to understand what really happened, and whether it could affect Volkswagen on a long term. Here’s the final take.


The current story in China

News sources have recently confirmed that the anti-monopoly regulator in China has fined the foreign-automaker for price fixing, and has fined the Chinese venture of Volkswagen AG and the China’s sales unit of Fiat (FIATY) Chrysler a combined $46 million.

This might sound as a warning signal to other foreign automakers operating in the market such as Daimler’s (DDAIY) Mercedes Benz and Tata Motor’s (NYSE:TTM) Jaguar Land Rover which are also being probed for possible anti-competitive behavior.


The price regulator in Hubei has stated that it would fine the sales unit of Volkswagen’s joint venture, FAW-Volkswagen Automobile Company Limited around $40.6 million for fixing prices of Audi models selling in the nation.

This news throws light on the interest of the Chinese authorities to bring the auto sector under special scrutiny amid accusations by media that global car makers are overcharging Chinese consumers. As per the set regulatory guidelines, the penalty in such cases might extend to 10% of the overall annual revenue earned from China by the company for breaking the anti-monopoly law. However, for the Volkswagen JV, this penalty covers only 6% of Audi’s annual turnover in Hubei.


What is Volkswagen’s reaction

The company’s premium auto unit Audi stated that it would accept the penalty imposed by the Chinese regulator and would change its management processes at one of its Chinese units after the regulatory authority discovered violations of anti-monopoly laws.

After the fine was charged, Audi officials stated, “Management processes in the sales and dealership structure are getting improved to prevent similar incidents in the future.” And they added, “Audi and FAW-Volkswagen attach great importance that all applicable antitrust and competition laws are adhered to."

As China remains the major automotive hub after the U.S., the German giant looks unmoved by this charge and is instead improving on its spending pattern in the nation to become a dominant player. Estimates for 2014 see car sales in the BRIC at 27 million cars, or almost matching the quantity expected to be sold in the U.S. and European Union together. And China is the hot bed for selling foreign cars. Audi of Volkswagen posted a wonderful second quarter in China with 21% increase in car sales this year, when compared year over year.

So as long as the growing middle and upper class in emerging nations like China provides a growing number of willing customers, the growth prospects look good for premium brands like Audi, even after this sudden incident which impinged on its top line growth.

Final word

Yes, Volkswagen needs to abide by the rules in the Chinese soil to survive and grow its business model. Such penalties might taint its image to some extent but the company knows well how to drive its growth story even after facing such sudden headwinds. So, one thing is obvious that Volkswagen is well positioned in China and will take appropriate steps to cement its dominance in the nation.

About the author:

We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

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