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VW sees China sales slump as rivals soar
(Agencies)
Updated: 2005-07-13 14:01

Hit by corruption allegations at home, German carmaker Volkswagen AG appears to be in big trouble in China too after reporting a sharp drop in sales while those of rivals soar.

Volkswagen's earnings have been under pressure for some time and it reported a loss for the first quarter but now it faces possible job cuts and the shutdown of plants on home turf as it tries to cope with the damage of a bribe-taking scandal involving several company officers.

In China, the company late Tuesday reported half year sales results, saying its two mainland joint ventures shifted a disappointing 265,000 vehicles in the first half of 2005 after 306,000 for the first half of 2004.

Although it downplayed the sharp drop as related to a change in reporting methods, analysts widely said that Europe's largest carmaker faces serious structural problems in China.

"It's been focusing on its production capacity, research and development and sales, while little attention has been paid to cost controls," said Jia Xingguang, chief analyst with China National Automobile Industry Consulting and Developing Corp.

Once unchallenged in China's passenger vehicle market, Volkswagen insisted that this was still the case, saying that 2005 volumes were calculated using wholesale figures that could not be compared to current retail sales data.

Meanwhile General Motors, the world's largest automaker, which itself is struggling with sharply declining sales at home, sold a record 308,722 units, a rise of 18.9 percent, in China in the first six months of 2005.

At Sino-French auto venture Dongfeng PSA Peugeot Citroen Automobile, total first half sales were up 54.9 percent at 72,470.

Similarly, Japan's Honda saw first half sales in China rise 41.4 percent to 117,641 vehicles.

After 12 months of sharply declining sales due to oversupply, overall sedan sales in the world's third largest vehicle market recovered nearly 10 percent in the six months to June, the China Association of Automobile Manufacturers (CAAM) said.

Whatever VW may say about the different figures, analysts said it could not explain more fundamental operational deficiencies.

Its venture with First Automotive Works (FAW), China's second largest car company, FAW-Volkswagen Automotive Co., booked a net loss of 300 million yuan (36 million dollars) for the first three months of 2005.

This compared with a profit of 1.23 billion yuan a year earlier, a company manager surnamed Li said.

Analysts had been expecting Volkswagen to report disappointing results this year due to eroding margins caused by high material costs, increased competition and a price war that has continued into this year.

Zhang Xin, auto analyst from Guotai Junan Securities, said that marketing strategies of Volkswagen's other venture with Shanghai Automotive International Co (SAIC) was also hurting the company.

"Car models launched by the two joint ventures sometimes target the same consumer so there is too much competition within the two joint ventures," Zhang said.

Despite the gloom, Volkswagen insisted that it still controlled 18 percent of the China passenger car market but that is a far cry from the nearly 50 percent it claimed three years ago.

Volkswagen, which 20 years ago ventured into China as the first Western auto manufacturer, was rewarded for its vision with years of near monopoly on government and taxi sales.

As China's growing passenger car market picked up speed in the late 1990s with the growth of a middle class, Volkswagen found itself the envy of all foreign rivals.

"That made the company forget some of the multinational's good habits and it instead learned bad habits from China's state-owed enterprises, such as having no desire to make progress and (failing to react to) challenges," said Jia.

"Now if there is no restructuring of its two joint ventures, one will die," Jia warned.

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