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VW targets emerging markets

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China and India have a lot of cars but they still need a lot more. Source: Reuters

It started out as the People’s Car, a bare bones tin can with a motor for a population impoverished by the Great Depression and hyperinflation. In the meantime, Germany’s Volkswagen has become one of the world’s biggest carmakers with a full range of makes and models, including highly engineered vehicles that compete with the world’s best. Now it is returning to its roots with a simpler people’s car, only this time the people are the teeming billions in China, India and other emerging markets.

Plans are well advanced, Handelsblatt has learned from highly placed sources in the company, to bring low-priced budget models corresponding to customers’ needs and manufactured domestically in the two giant Asian markets by 2020. In China, the local VW unit, together with its partner FAW, will develop and produce two SUV models that will sell at somewhere between €8,000 and €10,000 (($9,400-$11,800). In India, the local subsidiary of VW’s Skoda unit will produce an even cheaper car, coming in as low as €5,000.

Both versions may be cheap, but the goals are wildly different. In China, VW hopes to gain a further slice of what is already its biggest market and a well-established battle ground for German carmakers, including Mercedes and BMW in the premium segment. India, by contrast, is only just getting started – and VW has yet to successfully enter the market.

India could become the third-biggest car market in the world, after China and the United States.

These cars will have less engineering, fewer bells and whistles, and lower-quality finishing than VW’s products in other markets. Particularly in India, the new budget car will be based on the simpler, stripped down Skoda models already produced by the Czech unit in Europe. There will be no all-wheel drive, for instance, and engineers in Europe are looking for ways to further simplify the models. Initial talks with local suppliers have already started. The lower costs for parts and wages will make it possible to bring a car to market at the low price.

Analysts think India is on the threshold of major leap forward as a market. Current sales run less than 3 million cars a year, with a population well over 1 billion. That is fewer cars than in Germany, with its population of some 80 million. India could become the third-biggest market in the world after China and the United States. VW last year had a market share of just 2 percent.

To make it in India, Skoda would have to build a new assembly plant and analysts estimate VW is looking at an investment of €200 million to €300 million just to start with. The carmaker is under some pressure, however, as a planned joint venture with Tata fell apart earlier this year and a similar venture with Suzuki had failed to come together before that. The company hopes to make a decision on production by the end of the year.

In China, customer demands are somewhat higher, especially with regard to comfort. So VW is going to develop two SUVs for that market, using the Duster from Renault’s Romanian unit Dacia as a model. That vehicle strips out any unnecessary luxuries, using only plastic in the interior, for example. VW sold just over 3 million locally produced cars in China last year in its joint ventures with First Auto Works and Shanghai Automotive joint ventures. The new SUVs will be produced with FAW.

All of this requires the company to overcome its engineers’ reluctance to lower standards. Maintaining European standards of quality, however, has been an obstacle to sales, because the price was too high for these emerging markets. VW brand chief Herbert Diess is now giving his engineers free rein to work on stripped down models like their colleagues at Skoda. The price point in China, however, will be notably higher, topping €8,000.

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The two-pronged plan is a step toward fulfilling VW’s objective of getting into budget car production. The company is looking at other markets beyond India and China. The Skoda production in India could be exported to Southeast Asia, and then to the Middle East, South Africa, and sub-Saharan Africa as well. The company could eventually produce as many as half a million of the low-budget cars annually.

The Chinese SUVs, which will be sold under a different brand name, capture a new market for VW in China and could give it more the allure of a premium carmaker. They could also be exported to more mature markets, such as Russia or South America. Together, these budget models could propel VW to sales of 2 million vehicles a year and enable once and for all to get ahead of rival Toyota as the biggest carmaker in the world.

Even as it drives into the lower segment of the market, however, VW is not neglecting the upper segment. Parallel to the emerging market production, the company is setting its sights on Tesla with plans to develop at least four all-electric models by 2022. The company is now focused on where to make the investment for this new production. Works councils are putting pressure on management to concentrate production of the e-models in a single factory in the initial phase. For one thing, this would make it easier to monitor the quality of production as the new models are rolled out, according to worker representatives. As many as half a dozen different models could be built on the same platform.

Among other things, the works councils are concerned about keeping existing factories – and workers – employed at full capacity, rather than building new factories. Their choice for concentrating assembly of e-models for all the VW brands would be the existing factory in Zwickau, in the former East Germany. The first of the e-cars, the “Neo” compact, is to be produced there and take over the role of the Golf as the flagship model, competing with Tesla’s Model 3.

Stefan Menzel and Martin Murphy cover automobiles and industry for Handelsblatt. Darrell Delamaide adapted this into English for Handelsblatt Global. To contact the authors: menzel@handelsblatt.com and murphy@handelsblatt.com.

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Cheap and simple. Makes based on VW subsidiary Skoda (pictured above) hope to lead the way into India. Source: PR
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