VW Seen Losing Trust Among Chinese Consumers With U.S. Scandal

  • Hit to reputation may be game-changer in VW's race with Toyota
  • VW deliveries in China declined 5.8%, trailing overall market

Volkswagen AG may face a loss of trust among consumers in China after the German automaker admitted to cheating on U.S air pollution tests, adding another hurdle to its attempts to revive sales in its largest market and hurting its global race with Toyota Motor Corp.

The scandal has widened since the U.S. Environmental Protection Agency revealed on Friday that Volkswagen admitted that it had rigged diesel vehicles to pass emissions tests in the lab. While China has yet to say whether it will initiate a probe into VW, neighboring South Korea will start testing VW vehicles next month, while regulators in Taiwan and Australia are seeking clarification from the German automaker.

VW has underperformed in the Chinese market this year, with deliveries dropping 5.8 percent in the eight months through August even as industrywide passenger-vehicle sales climbed 6.3 percent. The company has attributed its poor showing to a mismatch of its products and the growing consumer preference for budget sport utility vehicles.

“If you have a leaky roof, the last thing you want is to meet a storm,” said Yale Zhang, a managing director at Autoforesight Shanghai Co. “Any damage to VW’s reputation and brand image could be a game-changer for its competition with Toyota both in and outside the Chinese market. It’s anyone’s guess how bad things can get.”

China Recalls

The U.S. revelation comes after VW initiated two high-profile recalls in China in as many years.

The company recalled almost 600,000 New Sagitar and Beetle vehicles last year after initially resisting consumer demands to fix broken rear suspension axles. Volkswagen only called back the vehicles after China’s quality inspector started an investigation into mounting complaints from owners.

In 2013, Volkswagen recalled 384,181 vehicles in China to replace defective gearboxes after state broadcaster China Central Television featured owner complaints about cars equipped with the company’s proprietary gearbox technology.

“In China, Volkswagen is already slowing down, so with this news, it’s certainly not going to help,” said John Zeng, Shanghai-based managing director at LMC Automotive. “Volkswagen already had the problem with the Sagitar recall in China and at this stage, it’s come out with this scandal in the U.S., there’s going to be an impact on their brand image.”

Volkswagen declined to comment on opinions of analysts and said it will share information “in due time” after it fully investigates the matter, according to an e-mailed response from Larissa Braun, its Beijing-based spokeswoman. China’s General Administration of Quality Supervision, Inspection and Quarantine didn’t reply to a fax seeking comments on whether they will inspect VW. Calls made to the media department of China’s Ministry of Environmental Protection went unanswered.

Investment Plans

China is crucial for Volkswagen in its bid to overtake Toyota as the world’s largest automaker. The Wolfsburg, Germany-based company sold about 35 percent of the group’s vehicles in China so far this year and plans to raise capacity in the country to 5 million vehicles by 2019 from 3.5 million in 2014. VW and its Chinese joint ventures had also said they’ll boost their investments to 22 billion euros ($24.6 billion) through 2019.

Chief Executive Officer Martin Winterkorn said Sept. 14 the company was convinced the market in China will continue to grow and plans new product introductions, undeterred by a slowdown in the country.

Despite the negative media attention surrounding the emissions scandal, VW may not lose market share in the longer run, said Dominic O’Brien, London-based analyst at Exane BNP Paribas, pointing to previous episodes where carmakers have recovered, like General Motors Co.’s ignition switch malfunction and Toyota’s problems with unintended acceleration.

VW’s actions are “sort of like cheating on the exam without doing the work” and “obviously not good” for the brand image, said O’Brien. “But it seems that consumers’ purchase decision is not necessarily that affected from these headlines.”

Even so, with every major car brand jostling for sales in China, the misstep by VW in the U.S., if not handled properly, may ricochet around the world, threatening its grip on the world’s largest market.

“You’re now going to have to clean up your act, to prove that you’re trustworthy again,” said Bill Russo, Shanghai-based managing director at Gao Feng Advisory Co.. “Because of the global nature of the auto industry, I don’t think you can firewall your problems that happen in one part of the world from the other markets.”

— With assistance by Alexandra Ho

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