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VW Recall Highlights Perils of Too Much Success in China

Volkswagen AG (VOW3), Daimler AG (DAI) (DAI) and Bayerische Motoren Werke AG (BMW) posted record 2012 sales fueled by demand in China. This year, that growth is at risk as the government in Beijing steps up scrutiny of the automakers and media outlets question their quality.

VW last month recalled 384,181 vehicles in China after state television featured complaints about vibrations, loss of power and sudden acceleration in Golfs and other cars. China Central Television also reported that BMW, Audi and Mercedes owners experienced dizziness from asphalt in their vehicles.

“We’ll take care of any customer who’s not satisfied,” Daimler Chief Executive Officer Dieter Zetsche said in a Bloomberg Television interview today in Shanghai. “But altogether we don’t think that there’s any real substance to this issue.”

The reports come as Chinese authorities have vowed to unmask producers of low-quality or dangerous goods. While Chinese companies haven’t been spared scrutiny, foreigners are frequent targets. In the past year, China Central Television (CHCETZ) has reported that McDonald’s Corp. sold chicken wings past their sell-by date, Carrefour SA (CA) mislabeled lower quality chicken as premium, and Apple Inc (AAPL). failed to replace the back covers of iPhones after repairing electronics inside. All have issued apologies and offered fixes.

Photographer: Jochen Eckel/Bloomberg

VW last month recalled 384,181 vehicles in China after state television featured complaints about vibrations, loss of power and sudden acceleration in Golfs and other cars. Close

VW last month recalled 384,181 vehicles in China after state television featured... Read More

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Photographer: Jochen Eckel/Bloomberg

VW last month recalled 384,181 vehicles in China after state television featured complaints about vibrations, loss of power and sudden acceleration in Golfs and other cars.

‘Analyze, Analyze’

China’s General Administration of Quality Supervision, Inspection and Quarantine didn’t respond to queries from Bloomberg.

China, the world’s largest auto market, is critical to German automakers’ ambitions of record deliveries in 2013 even as European sales contract for a sixth straight year. The carmakers can expect to face questions about quality standards during media events this weekend at Shanghai’s auto show.

“The three most important things to do when a problem like this occurs are analyze, analyze and analyze - and then be fast in solving the issue,” said Wolfgang Hatz, Porsche’s research and development chief, who oversaw engine and transmission development at parent VW before shifting to the sports-car maker.

The Germans are mindful of what happened to Toyota Motor Corp (7203). last year following tensions between China and Japan over disputed islands in the South China Sea. After widespread media coverage of Chinese protesters demanding a boycott of Japanese goods, Toyota’s deliveries in China fell 4.9 percent in 2012.

Dual-Clutch

China sales are forecast to grow to 37 percent of Volkswagen’s global vehicle volume in 2015 from 28 percent in 2010, according to researcher LMC Automotive. At BMW, China is expected to account for 24 percent of global car deliveries in 2015, double the level in 2010. Daimler’s Mercedes will sell 20 percent of its cars in China in 2015, up from 10 percent in 2010, according to LMC.

Volkswagen’s sales in China grew at a slower pace than the industry average in March, the month the CCTV report aired. VW, which includes Hong Kong and Macau in its figures, reported that deliveries increased 11 percent last month. That compares with industrywide growth of 13 percent, according to data from the China Association of Automobile Manufacturers.

The VW recall may cost as much as $600 million, LMC estimates. The Wolfsburg-based automaker began a recall April 2 to make unspecified fixes to its dual-clutch gearboxes.

Extended Warranties

“Customer satisfaction remains a key priority for us, that’s why we established a task force with experienced professionals in Beijing,” Jochem Heizmann, VW’s board member for China, told reporters in Shanghai today. “We’re in a proactive dialogue with all relevant government agencies.”

VW last May agreed to extend the warranty for the transmissions to 10 years in China, the carmaker’s biggest market, in response to customer complaints. The standard is two years.

Porsche pioneered dual-clutch gearboxes in race cars in the 1980s. The technology, which VW has rolled out in mass-market cars like the Golf in recent years, is a mix between a manual and automatic gearbox.

VW, Europe’s biggest automaker, says it has long conducted special tests on the vehicles it sells in China, driving them in different regions and climate conditions to ensure its cars hold-up on the country’s roads.

‘Thoroughly Tested’

Audi, BMW and Mercedes (DAI) have all pledged to look into complaints in CCTV’s report that it found asphalt, the road- paving material also used for deadening vibrations, in samples taken from their vehicles. Owners smelled a pungent odor and experienced dizziness, the TV channel said. The companies say they are investigating the issue.

“Of course we take the concerns in China very seriously and are investigating the matter,” Joachim Schmidt, sales chief at Mercedes, said last week. Yet he said he was surprised by the complaints.

“The components we use have been thoroughly tested before and we use them in vehicles across the globe,” he said. “You would assume that customers outside China might notice something similar.”

German carmakers spend billions of euros each year on technology to protect their images. Fueled by these investments, BMW (BMW), Audi and Mercedes -- the top three makers of luxury cars -- have tightened their grip on both the global and Chinese luxury car sectors in recent years.

Chinese Frustration

The government may in part be targeting the Germans because of their success, especially when compared to the slow development of China’s domestic auto industry, said Philippe Houchois, an analyst with UBS in London.

“To be blunt, there’s just a bunch of very successful subcontractors,” Houchois said. “This kind of attack or pressure on the foreign brands, and the Germans in particular, reflects the frustration.”

As they boost production and sales in China, the German carmakers must be vigilant about their reputations, said Lars Voedisch, managing director at public relations consultancy PRecious Communications in Singapore. VW plans to spend 9.8 billion euros ($12.9 billion), together with joint-venture partners, by 2015 to add new factories and capacity in the country.

“Even when it’s unfounded, they have to react,” Voedisch said. “It’s something that doesn’t go away and the Chinese media and online community will just accelerate and it’ll stay there.”

To contact Bloomberg News staff for this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net; Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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