Last month I wrote about Ford Motor Company (NYSE:F)’s China Strategy, highlighting the important trends in the Chinese market, and how important it was for Ford Motor Company (NYSE:F), a late entrant, to gain market share in the world’s largest auto market.
In 2012, Volkswagen outpaced the Chinese Auto industry handily, growing 25% compared to the country’s 9%, losing out only to Ford Motor Company (NYSE:F), which came off a much smaller base.
Volkswagen has been in China for 28 years, and still continues to have a first mover advantage, having built up extensive dealerships and a vast knowledge of Chinese customers’ taste and preferences. Much of its success comes from building cars to reflect these choices. Besides, it has not stinted on making 95% of its models, and all of its latest models, available in China. China is actually Volkswagen’s largest market, accounting for 2.8 million out of its 9 million vehicles sold in 2012.
Key growth drivers in China
Volkswagen forecasts the Chinese auto market to grow at a CAGR of 6%-8% in the next eight years from 2013-2020, and its production and sales to grow faster, between 8%-9%.
In Q1, 2013, Volkswagen grew sales 21% compared to Ford Motor Company (NYSE:F)’s 54%, increasing its market share 0.6%, while Ford Motor Company (NYSE:F) grew 1.3% and Hyundai 1.5%. General Motors Company (NYSE:GM) and Toyota Motor Corporation (ADR) (NYSE:TM)’s lost 0.5% and 1.4%, respectively.
The Chinese government in its typical top-down fashion wants to “encourage”
- Consumption-driven demand
- Emphasize domestic production, with more focus on innovation
- De-emphasize imports of products that can be made in China
- Expand further out into the hinterland, with emphasis on Metro urban hubs or mega cities
- Be more selective of foreign investments
All these trends help Volkswagen.
- It has 17 plants in the Asia Pacific region, second only to Europe’s 67
- It plans to increase its dealer network by 50% mostly in the West and the South, previously underdeveloped areas, dovetailing into the government’s strategy
- Volkswagen has innovated and developed new technology in building the first long wheel base model for China for the Audi A6L and developing the premium Audi limousine, the Audi 4L, locally
- Further tipping its hat to the rural market, it is opening the new plant in Urumqi in Western China
- Audi was a big reason for Volkswagen’s China success and with China’s luxury car market expected to outpace the US by 2020, expect Audi to remain on top
Competitors
Ford is likely to benefit from the same reasons as Volkswagen, especially in the less developed areas and is spending $5 billion in the next three years, opening 5 plants and introducing 15 models.
General Motors Company (NYSE:GM), led by Buick, increased vehicle sales by 13% in Q1 2013. It however lost market share due to better performances from Ford and Volkswagen. General Motors Company (NYSE:GM) also plans to be a big spender in the next four years, pumping in $11 billion along with its partners into the Chinese economy.
Laggard Toyota Motor Corporation (ADR) (NYSE:TM), the world’s largest car maker has struggled in China with only 4% market share, its April 2013 drop of 6.5% was its 9th drop in 10 months. It too plans to expand its presence in China increasing capacity to 1.2 million vehicles by 2015.
| Estimates | China | Volkswagen | Ford Motor (NYSE:F) | General Motors | Toyota Motor |
|---|---|---|---|---|---|
| Market Cap $ Bn | 96.5 | 61.3 | 47.4 | 192.1 | |
| P/S % | 38 | 38 | 26 | 86 | |
| M Size 2012 | 18.9 | 2.8 | .7 | 1.9 | .8 |
| M Growth 2012 | 9 | 25 | 54 | 12 | — |
| M Growth 2013-20 % | 6 to 8 | 7-9 | 20-25 | 11 | 15 |
| Planned Capacity Vehicles | 4 Mn by 2018 | 1.5 Mn by 2015 | N/A | 1.2 Mn by 2015 | |
| Planned Cap-Ex – $ Bn | 9.8 | 5 | 11* | N/A |
* With Partners
Unlike Detroit, German engineering never lost its edge nor its brand image. As Volkswagen makes its comeback in America its emphasis is on “German Engineering.”
I own stock in Ford and plan to hold it for at least another three to five years. While I don’t own Volkswagen yet, its continued strength in growth markets such as China, huge brand recognition worldwide and the vigor and dynamism brought by the new team, suggests that the market is underpricing Volkswagen at only 38% of sales. Time to take a closer look.
The article Volkswagen, King of The Chinese Road originally appeared on Fool.com.
Bobby Shethia has a position in Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Bobby is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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