Foreign Carmakers Face Heat From Chinese Consumers and EV Rivals

• Competition intense in China amid transition to electric vehicles

• Volkswagen and Tesla have both battled ‘storms’ on social media

Foreign auto giants wanting to sell their cars in China have been learning some important lessons in recent years.

One, is that they can no longer rely on a perception of superior design, given the rise in standards of local carmakers whose models are also proving popular, and the second is that social media can become a battleground for activist consumers if not managed carefully. For companies, it is now a vital facet of their public relations and sales strategies.

This comes on top of meteoric rises by local manufacturers such as Xpeng, Nio and Li Auto, all of which have seen their market value surge to levels that would have been unimaginable just a short time ago – topping General Motors and other long established foreign firms that were slow to commit to electric vehicle production.

Li Auto and Xpeng more than tripled their electric vehicle sales in July from a year ago, while they doubled at Nio Inc, helped by robust demand in China for new energy automobiles, Reuters said on August 2.

Volkswagen and Tesla are two of the biggest foreign carmakers in China but they have faced testing moments over the past two years in their bid to crack the EV sector in the world’s biggest car market.

Tesla, which has been a high-profile entrant in the Chinese market and a very successful one, had to change tack in April promptly after receiving consumer criticism and government attention after a car owner protested at the Auto Shanghai show.

It set up a taskforce to investigate the woman’s complaints partly because videos of the lady’s protests went viral and Xinhua News Agency had voiced opposition to the company’s ‘no compromise’ stance. The company response showed a level of flexibility and responsibility, which helped it to diffuse a concern that flared briefly in cyberspace.

At the end of June, Tesla was forced to undertake a software ‘patch’ or update to resolve a concern over its cruise control system – more negative publicity which CNN called “another bump in the road”.

Meanwhile, the bosses at Volkswagen’s headquarters in Wolfsburg realised in late 2019 they might have a serious problem in China after their flagship Passat sedan fared badly in an unofficial safety test carried out by an insurance industry body, which simulated a front-on driver’s side collision, a test widely used in the US for many years.

Crash-test video

The crash-test video, which showed the car mangled, also went viral, attracting millions of views and triggering a social media furore across China, where the German auto king’s success was built on its reputation for superior quality and engineering, Reuters revealed.

Volkswagen was not obliged to do anything – the Passat had passed the Chinese regulator’s frontal collision test, the same test that’s used in much of Europe, and one that the carmaker and many industry experts believe better reflects driving conditions in China.

Nonetheless, Wolfsburg acted swiftly, according to two people with direct knowledge of the matter. Days after the test results were announced, it assembled a team of dozens of engineers and managers to work with SAIC-Volkswagen, the 50/50 joint venture that makes Passats in China, they said.

In early 2020, that team decided that strengthening metal components should be added to the front of all new Passats and a variety of other models made at the Shanghai-based venture, at a cost of about 400 yuan ($62) per vehicle, according to the sources.

That structural modification, details of which had not been previously reported, cost tens of millions of dollars for the hundreds of thousands of vehicles that would be affected at the venture a year, the sources said. It was a significant partly because the company had been trying to trim manufacturing costs in China and globally.

The company’s response – in the face of online consumer activism – shows both the importance of China as the world’s biggest car market, but also the effort that Volkswagen is making try to ensure its 35-billion-euro ($42 billion) transition to electric vehicles is a success and that it can make good on its pledge to overtake Tesla to become the global EV leader by 2025.

Global automakers’ expensive renunciation of oil comes at a time when they can no longer count on the dominance they have enjoyed in decades gone by in China, where they’re feeling the heat from local gasoline and electric players challenging them on technology and design.

Asked about the 400-yuan modification, a spokesperson for Volkswagen said it was constantly improving its products according to customer feedback, and to make them safer.

Three decades in China

The new Passat in China was the first model to have such a structural modification when it was rolled out in mid-2020, according to the sources. It passed the insurance industry test that its predecessor had failed.

But the reputational and financial damage has proved more persistent for Volkswagen, which has been the top-selling foreign carmaker in China and has made largely healthy profits during its over three decades there, the longest of any overseas player.

Volkswagen‘s profit per vehicle in the country has fallen from levels of 1,400-1,500 euros around 2015 to around 1,000 euros and even closer to 800 euros in most recent quarters, according to Bernstein analysts who described China as “of utmost importance for VW’s financial health”.

Sales of the Passat, and more broadly from its venture with SAIC Motor, have slumped – something Volkswagen attributed mainly to the backlash over the failed crash test, as well as product line-up issues and a global chip shortage.

SAIC-Volkswagen‘s revenue dropped 26% to 174.5 billion yuan last year versus 2019, while profit fell 23% to 31 billion yuan. Sales of the Passat, once one of the best-sellers in its sedan class before the insurance body’s test, fell 32% to 145,805 vehicles, according to consultancy LMC Automotive.

While the Covid pandemic clearly played a big role, the decline at the venture was far steeper than the overall 6.8% fall in Chinese passenger vehicle sales in the same period, according to data from the China Passenger Car Association.

Volkswagen‘s China chief Stephan Woellenstein acknowledged in January that the failed crash test and subsequent online backlash had triggered the decline in Passat and SAIC venture sales. But last month, he said Volkswagen had fixed the problems revealed by the test, that the ructions from the episode had subsided and the carmaker’s Chinese business was recovering.

But there is quite some ground to regain in the large family car segment. A total of 47,480 Passats were sold in the first six months of this year in China, some way behind the 91,110 Toyota Camrys and 89,157 Honda Accords, according to LMC.

• Reuters and Jim Pollard

This report was updated on August 9.