Why Volkswagen Can’t Make Cheap Cars, And Why It Wants To Fix That – Forbes

Posted: Friday, September 29, 2017

A sign for the future for Volkswagen’s Chinese operation? The automaker is working on a budget brand for the world’s largest car market, planning to launch it in 2019. Photo: FRED DUFOUR/AFP/Getty Images

The battered Volkswagen is proving to be a tough cookie. It withstood the worst of Dieselgate, recovered its crown as the world’s biggest-selling carmaker and rolled out a relatively convincing preview of its battery-electric range, and the venerable Golf keeps rolling on.

But there is still one engineering and sales feat that remains unconquered, and for a company whose badge literally means the “People’s Car,” it’s a surprising failure.

Volkswagen can’t make budget cars. Never could, really. Never has, not since the early Beetles.

Its French rival, Renault, can. It’s so comfortable with the disciplined economics of budget-car development that it’s done it twice, once with the Dacia brand and again with the India-focused, industry-disrupting Kwid.

And Renault’s abilities at the cheap end of town have suddenly become a threat to Volkswagen, with the Renault-Nissan Alliance’s acquisition of Mitsubishi giving it enough volume and a big enough footprint around the world to be considered a serious ongoing threat.

Renault-Nissan Alliance Chairman and CEO Carlos Ghosn launched the Kwid in 2015. The cheap car is focused on India, where Suzuki dominates the market. It’s not Renault’s first budget attack, with the Dacia brand proving successful wherever it has gone. Photo: STRDEL/AFP/Getty Images

So Renault-Nissan-Mitsubishi can make cheap cars, but not Volkswagen.

Exhibit A: Volkswagen owns Czech brand Skoda, which Communism forced to change from a premium brand into a budget brand. Volkswagen brought Skoda’s development in line with its own, and now its cars are almost as expensive as Volkswagen’s.

Exhibit B: It tried doing the same with its Spanish brand, Seat, until fairly recently, when it made it a bit funkier and gave it SUVs.

Exhibit C: Its last effort at a budget car was the Up!, the A-segment city car that can be more expensive than the larger, better Polo, if you catch the right dealer promotions in Europe on a given week. Volkswagen was forced to re-pitch it as baby premium, a teetering pedestal that’s shared with the Smart Fortwo.

None of that stops Volkswagen from trying, and the brand’s head of development, Dr. Frank Welsch, insists it will have a Chinese-focused budget brand in showrooms within two years.

There have been stories that the budget development had been canned, but Welsch insists it’s proceeding according to plan and was never under threat.

The plan is to hit China before the end of 2019 with a budget brand with joint-venture partner FAW, complete with a small sedan, based off Golf Mark 6 engineering, and then a compact SUV and a three-row SUV.

“The only thing that is not changing (at Volkswagen) in the last six months is the budget car,” Welsch insisted, six months after revealing much of the project’s detail to me at the Golf Mark 7.5 launch. “Everything we discussed six months ago, that is still on track. There is no change, no change in timing or engineering or concept.

“The thing that you might think of is this Tata/Skoda story (a proposed budget-car development that has been cancelled). This is for India, and this is not a budget car for China. This is different, and I cannot comment what Skoda is doing.”

The Volkswagen brand’s head of technical development, Dr Frank Welsch, speaking at the launch of the upmarket Arteon in May this year. Dr Welsch is driving Volkswagen’s new budget brand for China. Photo: Krisztian Bocsi/Bloomberg

So what has been the actual barrier separating proper budget brands from not just Volkswagen but most of the German automakers? Welsch puts it down to too much engineering pride.

“Think about the structures we have. For years, we optimize cars to premium quality for European eyes, but if you look through Chinese or Brazilian eyes, they say we spend a lot of money on things the customers will not see or feel or pay for.

“We have to make a car the best in a certain market, but we don’t necessarily have to put in the same as in Europe to be in the top three of the class.”

It’s not just the automakers Welsch is targeting to change their thinking. It’s the supplier base, too.

“Sometimes in China for a Chinese budget car, should you choose from a supplier like Continental or Bosch, or do you just go to the partner company in China?” he said. “Budget companies mostly have supplier bases that are all Chinese, so we are able to connect with them through our joint venture.

“The surface quality standards of the chassis parts will be different, but who will see them or care? Nobody would care anywhere else in the world. But we have to lower our standards for what we see in Germany, which is why we haven’t been successful with cheap cars before.

“For good durability and good quality they are good, but visually not as good as Europe. They do not care about that. Our engineers traditionally do, but those customers do not.

“The cars for that brand have to work properly for 10 years, and we will make sure it does that, and we will test it for a 160,000-mile durability standard.”

Chinese auto buyers crowd the Haval stand during last year’s Beijing Auto Show. A subsidiary of Great Wall Motors, Haval’s cheap, quality cars found almost 800,000 buyers last year. Volkswagen sees it as a major budget-car rival in China. Photo: FRED DUFOUR/AFP/Getty Images

Locking the budget program down in China first means a target price of around 70,000 to 80,000 RMB ($10,500 to $12,000 at today’s exchange rates) for the starter sedan, with the SUVs to rise in cost from there.

“Two years ago, the car you heard about (for the budget brand) was a sedan. We changed this strategy early last year because in China the market research was quite easy to see that when we need a budget car, we also need a budget SUV.

“To be successful, we thought it would need two cars: a sedan and an SUV. It’s a bit like Jetta and Santana for our brand, but below these cars. Below 70,000-80,000 RMB, there is a market for them,” Welsch admitted earlier this year, before the budget brand was supposed to be “off” again.

It’s a sign of the necessary humility needed to learn in China that while Dacia is a target, Volkswagen has also benchmarked the cars and the business model of China’s own Haval brand.

Haval sold 790,000 cars last year, despite being launched by parent company Great Wall Motors only in 2013.

“Everybody knows China is a sedan market, but it’s not. The Chinese people who have less money, what do they like? They dream of SUVs. Look at the Haval H6,” Welsch pointed out. “We want to be as successful as Haval in that market.

“If we had added one SUV, then it’s quite easy to have two versions of that if we change the wheelbase and add a third seating row. Also, we have to keep in mind that economy segment will be a strong segment not only in China.”

Dacia’s Duster has been a huge hit wherever it has been sold, pitched at a budget price using superseded Renault parts. Volkswagen plans to ape that strategy. Photo: Krisztian Bocsi/Bloomberg

Volkswagen’s obsession with China is valid, given that it sold half its branded vehicles there last year and that the country has been immune to the fallout of Dieselgate, with virtually no diesel-powered passenger cars sold there.

“It will start in China, but there are a lot of economy markets, like Mexico and Brazil; there’s also India. We have no concrete plans with that, but it would not be strange,” the engineering boss admitted in an earlier interview.

Welsch plans to follow Renault’s Dacia strategy of using superseded underpinnings to keep costs low.

The budget range will go back to the tooling of the Golf Mark 6, which ceased production in 2013, indicating a front-wheel drive strategy, with a hang-on rear-differential for the SUVs.

“It won’t be off MQB (the Polo/Golf/Tiguan/Passat/Arteon/Touran architecture that is also used by Skoda, Seat and Audi),” Welsch said. “The brand will use some MQB components but not the MQB architecture. If you compare this to Dacia and what it is doing, that’s more like it.”

He added: “Dacia is using models of a former generation of Renault. Not the last stage of development, but the former stage of production.

“It could use some components from the PQ (Golf Mark 6) world, and if we have suppliers who invested in these parts and in Shanghai at FAW. Why not use components that are working properly but they have invested in production for 10 years already? This is much better for a project.”

The Volkswagen Group is already strong in China, with Volkswagen and Audi both claiming market leadership in their segments, with almost one in three of Audi’s 1.87 million global sales going to China.

“The easiest thing would be to stay in premium products and standardize and stay in that and leave the low price things to other players,” Welsch suggested. “But in certain parts of the world, we will need such economy cars, and in China, 40% already is with economy cars.

“We offer cars for 60% of the market or with 65% of the market, but if we want to be No. 1 in China, we have to address this budget market as well.

“It’s not easy, but we have to fight to get that knowledge to make low-price cars that make money because without making money, it’s not such a good idea.”

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