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April 19, 2005

COMMENT: Volkswagen: China crisis?

Volkswagen is set to replace the leadership of its Chinese operations with the vice-president of its Skoda unit in the Czech Republic, Winfrid Vahland.

Volkswagen is set to replace the leadership of its Chinese operations with the vice-president of its Skoda unit in the Czech Republic, Winfrid Vahland.

It is hoped that the change will help to overcome Volkswagen’s recent woes in the country. However, in the face of fierce competition and government macroeconomic strategy, Vahland faces a long and difficult road ahead.

Volkswagen has been losing market share in China for over a year. Indeed, at the start of the year the company saw its market share fall to just 11%, compared to the 50% of the market that it held four years ago, according to figures quoted by the Financial Times.

Even by the standards of the auto industry – where talk of expansion opportunities in the country is almost incessant these days – Volkswagen has gone into the country with gusto. The company has become increasingly reliant upon its Chinese subsidiary to prop up the rest of the business – a tactic that appears to have worked until quite recently (Goldman Sachs has estimated that as much as two-thirds of Volkswagen’s earnings per share were generated in China in 2003).

Yet company bosses should nevertheless be alarmed at the rapid erosion of the company’s previously dominant position. The suddenness of its fall from grace in China has compounded the problems Volkswagen is already facing elsewhere, as it battles to get sales back on track in other key markets worldwide.

Although it would be unjust to downplay Vahland’s credentials, the new boss will certainly have a difficult time ahead. While there are some variables which he can influence, such as investment in new models and marketing strategy, there are many that he cannot, and it is here that the problem lies. The Chinese government is actively seeking to curb consumer spending in order to stave off inflation, which will have a direct impact on the new car market. The country is also beset by intense competition, thereby making it virtually impossible to pass higher costs onto consumers.

As if the immediate Chinese situation were not enough pressure for Vahland to contend with, his tenure in charge could have important ramifications for the future of the Volkswagen group as a whole.

SOURCE: DATAMONITOR COMMENTWIRE (c) 2005 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.

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