Volkswagen Sees China Market Accelerating After Tough First Quarter

2/2 © Bloomberg. Ralf Brandstaetter, VW’s head of China 2/2

(Bloomberg) -- Volkswagen AG (OTC:VWAGY) expects a recovery in China’s passenger car market growth this year once supply-chain stresses and a wave of Covid infections following the country’s pandemic reopening ease. 

The world’s biggest car market is set to grow between 4% and 5% this year to 23 million vehicles, said Ralf Brandstaetter, the carmaker’s head of China operations, accelerating from a rise of 1.6% last year. While demand indicators are pointing up, China is beset by a massive spike in infections following the relaxation of its Covid-Zero policy. 

“The first quarter will certainly be a bit more difficult in comparison to the rest of the year,” Brandstaetter told journalists in Berlin. “This means that in the next few weeks, we shouldn’t allow ourselves to be influenced too much by the effects that are still there now.”

While growth is set to accelerate, Western carmakers are losing ground to local manufacturers offering cheaper models geared to local tastes. Tesla (NASDAQ:TSLA) already cut prices prices in China in October. Brandstaetter declined to say whether Volkswagen (ETR:VOWG_p) would follow suit. Last year, VW’s sales in its most important market slid 3.6% to 2.2 million vehicles during the country’s tough Covid measures that shuttered 70% of its showrooms at times. 

Volkswagen is expanding its EV lineup in China over the next two years with the Audi Q4 e-tron and the ID.7 sedan. It’s also weighing whether to offer electric Skoda models as the brand currently has a small presence in the country, Brandstaetter said. 

Europe’s biggest carmaker expects car sales in China to grow to between 28 to 30 million vehicles by the end of the decade - three times the size of the German market. EV sales, accounting for a quarter of total deliveries last year, are expected to top 30% this year, VW said.

The Chinese market for electric vehicles is developing “unbelievably fast,” Brandstaetter said, boosted by low electricity prices, a well-developed charging network and driving restrictions in some cities for non-electric vehicles. 

Local carmakers are also quicker to engineer new models, taking some two and a half years compared to four years for VW in Germany. Chinese carmakers are reacting faster to industry developments and consumer trends, especially on digital features, he said.

“Don’t get me wrong: There are good reasons why we need more time,” Brandstaetter said. “When it comes to quality, sustainable operations and the reliability of our vehicles, we stick to our high standards. But we will also have to adapt to this pace.”

VW in October announced it’s investing $2.3 billion in an autonomous driving joint venture with China’s Horizon Robotics Inc. Horizon will work with VW’s software unit Cariad to develop automated and assisted driving systems for China, integrating numerous functions on one chip to save costs and lower energy consumption. 

“Technology in China will be probably become less compatible with the Western world, and also the other way around,” Brandstaetter said. “We are proceeding from the idea that there will be separate technological spheres.”

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