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Business trends

Volkswagen cuts China forecast as auto market slows

German carmaker still upbeat about prospects despite slowdown

China is Volkwagen's biggest single market and despite the recent sales slowdown, executives with the German automaker believe the country still has strong growth potential.    © China Daily/Reuters

HONG KONG/BEIJING -- Volkswagen Group, the world's largest carmaker, is cutting its sales forecast for China, as concerns over the trade war with the U.S. dampen the once-vigorous growth of the world's largest auto market.

Jochem Heizmann, president and CEO at Volkswagen China Group, said the trade friction was having a "big impact" on the car market in China, where auto sales have fallen for three consecutive months since July. There was no sign of improvement in the coming months, he said.

"We have to reduce our planned [sales] volume," Heizmann said in an interview with the Nikkei Asian Review on Tuesday. The group earlier this year forecast 4% growth in 2018 for the Chinese car market. But recent data showed it was likely to end the year with flat or even lower volume compared with last year. "It is clear we can't stay on our former figures," he concluded.

VW does not export cars from the U.S. to China or vice versa, but like other automakers it has fallen victim to a wider spending slowdown in China, as consumers cut back on big-ticket items, given the uncertain economic outlook. China is VW's biggest single market, with the mainland and Hong Kong together contributing more than 40% to its global sales last year.

China's auto market took a bad turn in the second half of this year after decades of rapid growth, with sales slumping 11.6% in September on a yearly basis, its biggest decline in more than six years. Nevertheless, VW managed to stay slightly ahead of the market average, with a 10.5% year-on-year decline in the same month. In comparison, sales of American carmaker Ford slumped more than 40% in September, while Jaguar Land Rover had to close two plants in the U.K. for two weeks due to weak Chinese demand.

Volkswagen China Group's president and CEO Jochem Heizmann, pictured in Wolfsburg, Germany in March 2017, says "We have to reduce our planned [sales] volume."   © Getty Images

Despite the grimmer outlook, China remains an important market for the VW. Heizmann said China's auto market was far from hitting its ceiling. Even with low single-digit growth, the increased volume still represented considerable business for any carmaker, he said.

In addition VW is investing heavily in electric vehicles in China. The group recently broke ground on its first dedicated electric vehicle plant, a $2.45 billion joint venture in Shanghai between VW and China's SAIC Motor. It is scheduled to begin operations in 2020, with the capacity to make 300,000 vehicles a year.

The plant will start off manufacturing VW-brand sport utility vehicles. But it will later be used to make vehicles for the luxury brand Audi and the budget brand Skoda, according to Chinese media reports.

The Shanghai plant is just one of the moves VW is undertaking as part of its new business plan, announced in November 2017, which calls for spending 10 billion euros ($11.5 billion) by 2025 for the production and development of electric cars, plug-in hybrids and other so-called new-energy vehicles.

The idea is to build a plant that can support the assembly of a range of electric vehicles based on the MEB modular car platform. The facility will be equipped with about 1,400 robots and incorporate industry 4.0 concepts, including networked equipment and artificial intelligence technologies, to boost productivity.

VW is competing with General Motors for the top spot in China, the world's largest auto market, and hopes to use electric vehicles as a motor for future growth. While overall new car sales have slumped, those of new-energy vehicles are booming, up 81.1% in January-September to 720,000 units. This has been partly fueled by restrictions on license plates for gasoline-engine vehicles in major cities like Beijing. Now that it is hard to buy a new car that runs on gasoline, consumers have enthusiastically turned their attention to electric vehicles.

VW hopes to use electric vehicles to power its future growth in China.   © Reuters

The majority of China's electric car sales have been captured by BYD, Beijing Automobile Works and other local automakers who started mass-producing such vehicles early on. But with the Chinese government requiring all automakers to make and sell a certain percentage of new-energy vehicles starting in 2019, VW is trying to leverage its popularity in China's wider auto market into a greater presence in electric cars.

Other foreign players are stepping up their efforts as well. Tesla just secured land in Shanghai for a plant, and the leading automakers of Japan and the U.S. are drawing up plans to invest in new-energy vehicles in China.

Germany's Daimler also sells a dedicated brand of electric cars in China through a joint venture with BYD. But its production capacity stands at just 40,000 units a year, a mere fraction of VW's planned Shanghai plant.

The Chinese government wants the market for new-energy vehicles to surpass 7 million units in 2025, larger than Japan's entire auto market. The overall ability of each automaker, in electric vehicle quality, selling power and maintenance servicing, will be put to the test.

More than 28 million cars were sold in China last year, contributing close to one-third of the world's total auto sales."[China still has] a big potential to grow," Heizmann said. There was still strong demand for cars in lower tier cities. "Hopefully, the decline of the market in connection with the China-U.S. problems is temporary," he said.

Heizmann said VW still had "good chances" to grow faster than broader industry for the rest of the year, as it was launching more sport utility vehicles.

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