Volkswagen AG formed a partnership with a Chinese state-run company to jointly develop electric cars. The embattled German automaker is making a decision to double down in China, as it faces an increasingly challenged outlook globally following last year’s diesel-emissions cheating scandal.
Volkswagen will collaborate with China’s Anhui Jianghuai Automobile Co. (JAC) to develop and manufacture new energy vehicles (NEVs)—both fully electric cars and hybrid cars, which are powered by a combination of electric and gas combustion motors.
The decision makes business sense considering Volkswagen’s limited outlook in other markets.
For one, Volkswagen owes a preliminary $15 billion fine in the United States following an embarrassing and well-publicized diesel emissions scandal—up to 11 million cars worldwide were fitted with software to cheat emissions testing. The company faces ongoing investigations in several other jurisdictions, including its home market Germany, and has set aside provisions of 18 billion euros ($20.2 billion) to pay for fines and costs of fixing affected vehicles.
With its diesel technology—purported to be clean and highly efficient—under sales embargo in key markets, Volkswagen needs to fast track alternative green car technologies to stay viable.
Incidentally, Volkswagen’s China business is relatively untouched by the scandal. China has been Volkswagen’s biggest single market, maintaining high visibility by being one of the first foreign automakers to enter the country three decades ago.
Doubling Down
Unlike the U.S. market—where year-to-date August sales are flat compared to 2015—demand for cars in China has been surprisingly robust in 2016.
China’s slowing economic growth hasn’t hampered auto sales. Last month, foreign and domestic automakers sold 1.8 million vehicles, an increase of 26 percent from last year, according to the China Association of Automobile Manufacturers. More than 14.4 million cars were sold to date in 2016, which is on pace to break last year’s 24.5 million record.
Analysts expect the strong sales to be temporary, however. A reduced auto sales tax, which 70 percent of cars sold in China qualifies for, is set to expire by the end of the year. Nonetheless, Chinese demand is still expected to outpace growth in U.S. and European markets.
Through July, Volkswagen sold 2.2 million cars in China, which amount to more than a third of the group’s global deliveries. The amount exceeded units sold in all of Western Europe. In the U.S. market, the Volkswagen brand’s sales fell 14 percent through July, according to Autodata, even as the rest of the industry witnessed gains of 1.3 percent.
For China to have assumed increased importance for Volkswagen since the diesel emissions scandal broke last September is only logical. In August, Volkswagen appointed company veteran Stephan Woellenstein to the newly created position of China CEO of Volkswagen, in an effort to “ensure future viability” for the brand in China, according to a statement from the group.
Driving Electric
Beijing views electric vehicles as strategically important for China’s economic growth. The Chinese Communist regime hopes to boost nationwide fuel economy of new cars sold by 30 percent by 2020. Its goal is to make 3 million NEVs, such as electric and hybrid cars, per year by 2025.
Chinese sales of NEVs quadrupled last year to almost 330,000 units, exceeding the U.S. market as the biggest in the world.
Over the first six months of 2016, sales of NEVs have exceeded last year’s pace with 170,000 sold. Most of such cars sold are domestic marques such as the BYD Tang and the Kandi Panda.
