Made in China VW to boost Asia sales by exporting cars out of China

Aiming to compete with Japanese and Korean rivals, the German automaker plans to start exporting its Chinese-made cars to neigboring markets in Southeast Asia.
Not going south this time, right?

Things are going great for Volkswagen in China: Last year, the firm sold as many as 3.2 million vehicles in the world’s largest car market, 5.9 percent up on 2016. However, the fast-growing auto markets in neighboring Asian countries have been far more challenging for the world's biggest carmaker so far.

To boost its anemic sales in Southeast Asia, Volkswagen plans to start exporting its own Chinese-made cars there, including those produced at two new factories it plans to open in the near future. This weekend, the company announced it had signed an export agreement with its Chinese joint-venture partners FAW and SAIC.

As a first step, the German automaker will deliver Chinese-made cars to the booming economies of Southeast Asia, said a VW spokesperson. But that is only a first step: Other emerging markets are soon to follow. This did not imply any production cuts at other locations, the spokesperson said: “It’s not about competition between China and our other export facilities. It’s about creating an additional source of supply.”

Volkswagen declined to say which specific models it planned to export from China. “It will be models which have been particularly successful in China,” said the spokesperson. VW believes these vehicles should also do well in neighboring Asian markets.

The Southeast Asian car market is growing rapidly, on par with the high GDP growth rates seen in a region that comprises a dozen emerging economies including Thailand, Vietnam and Indonesia, with a combined population of 650 million. According to the ASEAN Automotive Federation (AAF), a trade association of carmakers based in the regional organization, sales in November 2017 were up 5.4 percent in comparison with the same month one year prior.

Successfully exporting to Southeast Asia would lessen the dependence that VW and other German manufacturers have on the Chinese market. Volkswagen, spokesperson

Some countries have seen particularly impressive figures, for example, in the Philippines, where sales leapt more than 15 percent last year. The first Volkswagens exported from China will likely go there: “The market in the Philippines is growing very rapidly,” confirmed VW's spokesperson.

From March on, other countries in that region will also see shipments of Chinese-made Volkswagens. “We are optimistic, and expect to soon be exporting several thousand cars a year,” he said.

Successfully exporting to Southeast Asia would lessen the dependence that VW and other German manufacturers have on the Chinese market, where growth has been steadily falling in recent years. Previous data from the German Association of the Automotive industry, or VDA, suggests that 2017 will be a reasonably healthy year for the Chinese car market, growing 2 percent, with over 24 million cars sold.

But Volkswagen and other German automakers are definitely falling behind Asian competitors in Southeast Asia. The early running has been made by Japanese and Korean manufacturers, whose cars are everywhere in the region's bustling — and often gridlocked — cities. On the other hand, German vehicles are an exotic sight in Bangkok, Manila or Jakarta. No German carmaker has production facilities in the region: They must either export directly, or complete final assembly only in local factories.

A Beijing billboard: Part of VW's attempts to get Chinese consumers to buy more of their cars.

Volkswagen has plans to build a large factory in Southeast Asia: The firm received approval to build a plant in Thailand three years ago and has successfully applied for a government subsidy program in that country. As yet, however, there is no sign of an immediate construction of a new VW production facility there.

Exporting cars from China is not thought to be VW’s long-term solution. Asked if the company had given up its idea of Southeast Asian production, the VW spokesperson insisted: “This is not a decision against anything.”

Southeast Asia is not the only emerging market where Volkswagen has been struggling to tap booming car sales. In India, a country that could become the third-biggest market in the world after China and the United States, VW had a market share of just 2 percent last year, despite operating a production facility there. But even the cars VW manufactures in its Pune plant are too expensive for Indian buyers, who favor low-cost vehicles with an entry price of $5,000 (€4,080).

To make it in the highly competitive market, where total car sales jumped by 8.8 percent last year and passed the 3-million mark for the first time, VW is considering an investment of €200 million to €300 million to build a new assembly plant for its Czech subsidiary Skoda, whose vehicles typically are more affordable than other brands owned by VW. The firm suffered a blow last summer when its plans for a joint venture with Tata fell apart.

Without local production focused on budget vehicles, the biggest carmaker in the world will face an uphill battle to significantly increase its footprint in India. Last year, VW and its various brands sold less than 75,000 vehicles in the world's second-most populous nation, with Skoda sales jumping by over 30 percent.

Frederic Spohr is Handelsblatt's Southeast Asia and India correspondent. Jean-Michel Hauteville, an editor with Handelsblatt Global in Berlin, also contributed to this report. To contact the author: [email protected]