* Plans to launch new low-cost brand in China by about 2015
* Seen priced around 6,000-7,000 euros - company sources
* No-frills brand seen critical for emerging market growth
By Andreas Cremer and Henry Foy
April 20 If Volkswagen is to achieve
its goal of becoming the world's biggest automaker, it needs to
conquer the only market where the German group trails major
competitors: low-cost cars.
Europe's biggest carmaker plans to launch a budget brand in
China with one of its local partners by about 2015, aiming to
draw on more than 2,000 dealers and a market share of over 20
percent to take on similar no-frills ventures established by
General Motors, Nissan and Honda.
The brand, likely to be a major talking point at the
Shanghai auto show, may include a van, estate and small sedan
priced about 6,000-7,000 euros ($7,800-$9,1000), company sources
have said. If successful, it could be replicated elsewhere.
But expanding into budget cars is not without its risks for
a group which makes more than half its 11.5 billion euros ($15.1
billion) operating profit from luxury marques like Audi and
Porsche. And competitors are not standing still.
"It's difficult for any carmaker to unlearn many decades of
engineering," said Deepesh Rathore, managing director of
research firm IHS Automotive in India, referring to VW's
traditional focus on technologically advanced vehicles.
In the face of plunging European car sales, VW has continued
to prosper thanks to strong demand for its upmarket models in
emerging markets, and it is determined to snatch the global
sales crown from Toyota in the next five years.
But a group which makes everything from motorcycles and
supercars to 40-ton trucks increasingly feels that to do this -
and then stay ahead - it will have to address the boom in demand
for no-frills cars, particularly in developing economies.
"We're having talks about this on a rolling basis," said
Bernd Osterloh, deputy head of VW's supervisory board and the
group's top labour representative. "We have to tap new markets
like Southeast Asia or Africa more vigorously than before."
The opportunity looks huge. Global sales of cars priced up
to $11,000 are forecast to surge 39 percent to 33.1 million cars
by 2020, accounting for about a third of the world market, from
23.9 million last year, according to IHS Automotive.
At the same time, the two largest markets for budget
vehicles, China and India, are expected to see sales in the
segment increase 44 percent and over 100 percent to 7.02 million
and 5.03 million respectively, IHS data show.
THE LOW-COST CAR IMPERATIVE
VW has long neglected budget cars, fearing that making money
on stripped-down vehicles jars with its global pursuit of
quality and profitability, a senior VW manager said on condition
of anonymity because the matter is confidential.
It seems the German group is now prepared to put these
concerns to one side in a bid to build a stronger presence in
some of the fastest growing car markets.
In India, for example, where cars smaller than four metres
account for three-quarters of sales, VW is trailing Toyota, Ford
and General Motors (GM), which in recent years have earned
a foothold in the market by rolling out country-specific
VW's only model in those segments, the Polo, starts at
around $9,100. Maruti Suzuki's entry-level model, and
India's biggest-selling car, the Alto, costs half that price,
while Hyundai's small-car range starts at around
Starting in China seems logical for VW. Not only is it the
world's biggest car market, but the German group has over three
decades of experience there and is growing sales strongly.
To comply with local rules on manufacturing, VW's budget
brand is expected to be a co-venture with one of its local
partners - SAIC or FAW Group.
And to keep costs low, VW would use pre-existing mechanics
from models that have gone out of production or are nearing the
end of production, rather than develop new costly underpinnings
for the new brand from scratch, VW brand development chief
Ulrich Hackenberg told Reuters.
CHEAPER AND CHEAPER
However, the German group will have a fight on its hands
from the likes of GM, which has already launched its low-cost
Boajun brand in tandem with SAIC and Wuling, and
Nissan, which has the Venucia brand with partner Dongfeng.
And even if VW cracks the low-cost market in China, it is
unclear how easy it will be able to apply its learnings in other
markets, where it may have a weaker presence.
Meanwhile - and largely in response to Europe's plunging car
market - rivals like Renault and GM's Chevrolet, as
well as Hyundai and affiliate Kia, have been improving their
budget offerings for years, closing the gap with mainstream
brands in everything from design to fuel efficiency.
Renault's so-called Entry models, initially a flop in target
markets like India, were an accidental hit back home and have
become the French automaker's biggest earner, with profit
margins above 6 percent. Italian rival Fiat is also
mulling a low-cost brand to penetrate India.
Renault and affiliate Nissan are also devising an even
cheaper crop of budget cars for India and other emerging
markets, including a vehicle platform that Nissan's revived
Datsun brand would also use.
The decline of Tata Motors' $3,000 Nano, however,
shows that the race to the bottom isn't without risks. With its
breadth of technology, VW may well stay out of the ultra-cheap
"If they (Renault-Nissan) have as much success as Tata with
the Nano...," VW's Osterloh chuckled.