Volkswagen to Recall Cars in China Over Gearbox Defects

Volkswagen AG (VOW), Europe’s largest automaker, plans to recall vehicles in China after drawing scrutiny from the nation’s quality inspector and state broadcaster over defective gearbox systems.

The company will conduct a voluntary recall related to its direct-shift gearbox system, Volkswagen said in March 16 statement, without providing details. The statement came after China’s General Administration of Quality Supervision, Inspection and Quarantine said it told the German automaker to conduct a recall, and after Volkswagen was featured in China Central Television’s annual show about anti-consumer practices - - a program that also featured Apple Inc. (AAPL) and Anhui Jianghuai Automobile Co. this year.

The Volkswagen case may test China’s recall laws introduced this year, which give the watchdog broader powers to order investigations and impose fines should manufacturers and importers fail to recall faulty products in a timely manner. The nation’s legislature approved plans last week to expand the authority of the food and drug regulator amid growing public discontent over quality and safety.

“Any manufacturer, under the new law, should be aware that there’s an increase in the chances that they’ll be ordered to recall,” said Paolo Beconcini, managing partner at Carroll, Burdick & McDonough LLP in Beijing, whose firm advises European and U.S. automakers on product liability and intellectual property issues in China.

Photographer: Michele Tantussi/Bloomberg

A man holds a Volkswagen AG (VW) flag, left, alongside the Chinese national flag during the German-Chinese signing ceremony at Volkswagen AG's headquarters in Wolfsburg, Germany on April 24, 2012. Close

A man holds a Volkswagen AG (VW) flag, left, alongside the Chinese national flag during... Read More

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Photographer: Michele Tantussi/Bloomberg

A man holds a Volkswagen AG (VW) flag, left, alongside the Chinese national flag during the German-Chinese signing ceremony at Volkswagen AG's headquarters in Wolfsburg, Germany on April 24, 2012.

Recall Estimate

As many as 680,000 units sold in China, including Bora, Golf, Passat and Lavida models, might be equipped with the DSG system involved, according to estimates by auto research LMC Automotive.

Volkswagen is currently “figuring out the different scenarios,” Christoph Ludewig, a spokesman for the company in Beijing, said in an e-mail today. “We are in touch with AQSIQ and will announce more when we have details.”

The company said in May last year that it had sold almost 1 million DSG-equipped vehicles in China.

Chinese owners of VW vehicles fitted with the technology -- a system with two gearboxes that help enhance gear changes and improve fuel economy -- have reported abnormal vibrations, loss of power and sudden acceleration, according to CCTV’s report.

The Wolfsburg, Germany-based automaker has addressed issues with the system in China since last year. In May, it said its Chinese division agreed to extend the warranty for the automatic transmission technology to 10 years in response to customer complaints. The standard warranty is two years.

Photographer: Dado Galdieri/Bloomberg

In its March 16 statement, the quality watchdog didn’t say how many Volkswagen vehicles would be involved in the recall and calls to its news department seeking comment went unanswered over the weekend. Close

In its March 16 statement, the quality watchdog didn’t say how many Volkswagen vehicles... Read More

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Photographer: Dado Galdieri/Bloomberg

In its March 16 statement, the quality watchdog didn’t say how many Volkswagen vehicles would be involved in the recall and calls to its news department seeking comment went unanswered over the weekend.

Driver Feedback

Only a “few hundred” of DSG-fitted vehicles had faults that prompted driver feedback, according to a Bloomberg News interview with Harthmuth Hoffmann, a company spokesman, on May 31.

Companies operating in China, both domestic and foreign, are increasingly bracing for the annual CCTV show, broadcast every March 15 for World Consumer Rights Day, as the world’s second-biggest economy continues to expand.

Last year, France’s Carrefour SA (CA) shut an outlet in central China after being featured on CCTV. The year before, Henan Shuanghui Investment & Development Co. shares tumbled 10 percent after CCTV reported the company bought pigs that were fed an illegal additive.

The broadcast comes as China ushers in new state leadership for the first time in a decade, with Premier Li Keqiang yesterday pledging to improve consumer safety by tackling food problems and the environment with an “iron fist.”

Gearbox Problems

In its March 16 statement, the Chinese quality watchdog didn’t say how many Volkswagen vehicles would be involved in the recall and calls to its news department seeking comment went unanswered over the weekend. The regulator said it will compel the automaker to call back the vehicles if it doesn’t comply.

In its March 15 program, CCTV also investigated alleged flaws in the after-sales service of Cupertino, California-based Apple. Carolyn Wu, the company’s spokeswoman in Beijing, said the company has established a network of more than 500 authorized service centers in 270 cities across China to provide “unmatched” support to owners of its devices.

“Apple is dedicated to making the best products in the world and delivering unmatched customer service everywhere we do business,” Wu said in a phone interview today. “Our team is always striving to exceed our customers’ expectations, and we take any customer concerns very seriously.”

Apple Sales

Apple slipped to sixth place from fourth in China’s smartphone market in the third quarter of 2012. Samsung leads the China smartphone market in share, and four domestic suppliers also now outsell the iPhone in the nation, according to market researcher IDC.

Even so, Apple’s sales in China in its fiscal first quarter climbed 67 percent from a year earlier to $6.83 billion, the company said in January.

CCTV said in its broadcast that Anhui Jianghuai Automobile Co. sold cars with rusted chassis. The company said in a statement on its website on March 16 that a “lack of experience” resulted in the failure to ensure the body structure was properly painted to put off rust. The company said it has fixed the rust issue of 6,579 affected vehicles and will work with the quality regulator to issue a recall.

The consumer program also reported on impure gold made in a workshop in Shenzhen and sold in shops in Tianjin and Hebei, and on some Chinese medical companies, including one in Henan province, who hired actors to masquerade as doctors to promote products.

CCTV also investigated the use of substandard concrete by some developers in the southern city of Shenzhen who used low- quality sea sand instead of river sand. The Shenzhen Housing and Construction Bureau found 31 concrete-mixing plants violated industry rules, according to a statement posted on its website on March 16.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net; Edmond Lococo in Beijing at elococo@bloomberg.net; Michael Wei in Shanghai at mwei13@bloomberg.net

To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net

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