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Dongfeng-Volvo, VW Chase Low-End Market in China

Volkswagen Polo on display at an auto expo in Guangzhou, China (image via Shutterstock)

A couple of news bits from the Chinese auto space are underscoring how competitive the sector has become, with domestic carmaker Dongfeng Motor signing a new tie-up with Swedish truck maker Volvo, as Germany’s Volkswagen moves closer to entering the low-end market traditionally shunned by foreign names. Both of these cases show that big-name automakers, both domestic and foreign, will have to look for creative new ways to keep their business growing in the hyper-competitive Chinese market, and that the days where companies could simply construct a new multibillion-dollar factory to fuel additional growth may be in the past.

Let’s start with Dongfeng, which announced over the weekend it will form a truck-building joint venture with Volvo. Before I go any further, I should emphasize that the Volvo in this joint venture is different from the struggling car-making company also called Volvo, which is now owned by the parent company of Geely Auto.

Under this newest deal, the truck-making Volvo is paying about 5.6 billion yuan, or nearly $900 million, for a stake in Dongfeng’s truck-making unit, which will then become a joint venture. Volvo points out the deal will make the world’s biggest truckmaker, and will significantly boost its China presence. The deal must still receive approval from Beijing — something that was easy to get in the past but has become increasingly difficult as Chinese regulators veto more deals that don’t bring major new value to the market.

In this case, I do think the deal will get approved since it is coming in the truck-making space, rather than the more crowded car-making sector. What’s more, the deal also looks like a smart one for Dongfeng, as it will help to ease the company’s reliance on its car-making joint ventures with Japanese players Honda and Nissan. Dongfeng saw sales from both of those Japanese joint ventures plummet last fall after Chinese consumers boycotted Japanese brand cars following the flare up of a territorial dispute between Tokyo and Beijing. In another bid to diversify, Dongfeng is also reportedly close to negotiating another new joint venture with French car maker Renault.

Moving on to the second news bit, media are quoting a Volkswagen executive saying that the company may soon build its first low-cost car in China, as it tries to enter a segment of the market traditionally dominated by big domestic names like Chery and Geely. The executive said VW has already applied for permission to build such cars, which would carry price tags as low as the equivalent of 5,000 euros each and be branded separately from Volkswagen.

VW previously discussed this initiative as early as a year ago, but this latest news indicates that it is going ahead with the plan and now just waiting for necessary approval. I’m surprised the company isn’t moving quicker, as VW’s chief rival General Motors has found huge success with its first low-end model, the Chevy Sail, which has become China’s second best selling model since its launch. GM has also launched its own China brand, Baojun, again targeting the lower end of the market. Look for Volkswagen to become more aggressive with this new low-cost car initiative once it receives permission, with production likely to begin by the end of this year.

Doug Young lives in Shanghai and writes opinion pieces about tech investment in China for Techonomy and at www.youngchinabiz.com. He is the author of a new book about the media in China, The Party Line: How the Media Dictates Public Opinion in Modern China.

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