China Auto Market Limited Impact from US Investigation over Volkswagen Diesel Engines

Date: 2015-09-23

Diesel engines have only 0.4% share in China PV market. For a long time, diesel cars have never become mainstream products in China due to concerns over diesel supply (which is mainly consumed by the goods transportation sector, i.e. trucks and vessels), and diesel quality. As a result, the share of diesel engines in China鈥檚 passenger vehicle (PV) market declined to 0.4% YTD from just 1.2% in 2005. That said, VW鈥檚 violation of the US Clean Air Act is not likely to raise public concerns over vehicle emission or safety in China and we don鈥檛 expect it will have a material impact
on auto sales other than VW鈥檚 brand reputation.

 VW Group deliveries in China down 6% YTD due to lack of SUVs. VW Group (including VW, Audi, Skoda and other brands) delivered a total of 2.26m vehicles in China for 8M2015, down 6% YoY. The lack of a strong SUV line-up and changeover of several sedan models, coupled with the recent slowdown in auto demand, should be main reasons for VW鈥檚 weak performance in China this year in our view.

SAIC-VW outperforming FAW-VW. VW has two major joint-ventures (JVs) in China, i.e. SAIC-VW (two brands: VW and Skoda) and FAW-VW (VW and Audi). SAIC-VW auto sales dropped 3% YTD while FAW-VW fell 14%. The VW Tiguan, one of the best-selling SUVs, is assembled by SAIC-VW. However, FAW-VW doesn鈥檛 have any SUVs of the VW brand other than the Q3 and Q5 under Audi.

Great Wall Motor: diesel engines mainly used for pick-up trucks. About 50% of GWM鈥檚 pick-up trucks, which are classified as commercial vehicles in China, use diesel engines. Diesel engine penetration for its SUVs (mainly the H5 and H6) is about 3%. All the vehicles are able to meet China鈥檚 National 4 and National 5 emission standards (equivalent to Euro 4 and Euro 5); thus we believe it is not likely to be impacted by the VW diesel engine issue.

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