Diesel, as well as the engines powered by the liquid fuel, are named after Rudolf Diesel. The German engineer patented a compression ignition engine and first demonstrated it at the 1900 World Fair. He powered it with peanut oil. But he didn’t live to witness how his invention would revolutionise heavy machinery. On September 29, 1913 Diesel disappeared from a steamship off the English coast. Days later his body was said to have been found by a Belgian boat and then buried at sea.
Exactly 102 years ago this week the newspapers were full of speculation as what had led to Diesel’s mysterious demise. Conspiracy theories abounded. One was that he was snuffed out by the German secret service (the thinking: his diesel engine played a key role in the development of the submarine and they didn’t want him to share its secrets with the Brits). Another was that worried petroleum companies were behind his death.
Diesel was back in the headlines again this week. This time it was on news that Germany’s biggest carmaker Volkswagen had systematically cheated on US emission tests (making its cars seem more fuel-efficient than they actually are). At least 11 million cars are set for recall and the German firm has already lost 40%, or $30 billion, of its market value.
But what does the scandal mean for Volkswagen in China, a market that had just helped to propel the German producer past Toyota as the world’s biggest carmaker in the first half of this year?
Volkswagen ranks top in China’s car market with about 18.1% of the market as of August, according to research group LMC Automotive. Chinese car sales also contributed about 65% of the German firm’s profits last year.
The most common reaction from Chinese consumers on the scandal has been disbelief, given the very strong reputation of German engineering in China. “I thought ‘Made in Germany’ was the seal of absolute quality,” one widely forwarded remark on weibo complained. “Isn’t Volkswagen’s company motto: Truth in Engineering?” another asked.
More cynically, another netizen wrote: “The Germans have learned how to cheat, perhaps because they [Volkswagen executives] have been in China too long.”
Volkswagen’s two main joint ventures in China – with state giants FAW and SAIC – have both put out statements saying that they don’t make any of the models implicated in the scandal. But China Daily reckons the episode will still dent Volkswagen’s brand image among consumers. “Its reputation will suffer and the tarnished image will lead to more sales slumps,” Yale Zhang, a consultant at Automotive Foresight, told the newspaper. “To make matters worse, the scandal comes at a time when Volkswagen’s sales are already falling in China.”
Sales dropped 5.6% year-on-year to 1.74 million units in the first six months of 2015. The decline came at a time of attacks from state broadcaster CCTV, which criticised VW and other foreign carmakers for overcharging for spare parts at their local dealerships (see WiC275).
Volkswagen was also singled out by the channel’s consumer affairs programme for ignoring customer complaints about oil leaks in some of its engines.
Volkswagen had intended to double-down on its spending on the China market, revealing plans to invest $25 billion between 2015 to 2019 to consolidate its leading position.
But will the scandal lessen the appeal of diesel fuel in China too? According to the Global Times, Volkswagen had been trying to export its diesel-powered cars to the country for several years. However, its plans ran into stiff resistance after intensive lobbying from American and Japanese carmakers.
“Volkswagen enjoys an absolute technological edge in diesel vehicles. If this market is opened the only beneficiary will be Volkswagen,” the Global Times reports, citing an industry insider.
This technological mastery is now heavily in question, of course. But before that became plain, rival foreign automakers seemed to have convinced China’s environment bosses that diesel cars weren’t a good idea. Only about 15% of vehicles in China run on diesel, figures from the Ministry of Environmental Protection suggest, almost all of them trucks and buses. However, their diesel engines accounted for nearly 90% of particulate matter emissions in 2013. Diesel exhausts tend to emit more particulates than their gasoline equivalent, and particulates are already a major health concern in many Chinese cities. Because policymakers don’t want to see the same levels of pollution from cars, they’ve pushed for emission-reducing equipment that adds 15% to the price of a new diesel vehicle. In the capital city Beijing the local government has gone further, banning drivers of diesel cars from getting licence plates at all.
The result is that sales of diesel cars account for such a miniscule fraction of the total market that hardly any firm bothers to make them in China. Only 9,046 cars with diesel engines were produced there last year, according to IHS Automotive, another car industry research group.
But the irony for Volkswagen is that this diesel deficit could limit the backlash against the German firm in its largest market.
“The Chinese government has been supporting development of electric vehicles instead of diesel-powered cars,” says Steve Man, an analyst with Bloomberg Intelligence. He adds that given the negligible Chinese market for diesel cars, Volkswagen’s sales there ought to be far less impacted than its sales in Europe and the US, making China “the saviour for the company”.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.