CAR PRICE WAR LOOMS IN CHINA AS SHANGHAI VOLKSWAGEN CUTS PRICES
Volkswagen (VW) operates two joint ventures, FAW and Shanghai, in China. It is market leader but, with increasing competition from a growing number of MNCs, VWĂ˘â‚¬â„˘s market share in China fell from about 50 per cent in 2003 to 15.7 per cent in the first seven months of 2005. Indeed, in the first half of 2005 VW made an operating loss of Ă˘â€šÂ¬23m (US$28.4m) compared with a profit of Ă˘â€šÂ¬251m in 2004. For the full year of 2005 losses were expected. The joint ventures with FAW and Shanghai sales fell 31 per cent and 49 per cent respectively, according to Automotive Resources Asia.
In response to this situation, VWĂ˘â‚¬â„˘s strategy was to improve efficiency by merging the retail operation of the two joint venture partners, cutting costs and changing sourcing strategies. The Chinese expansion plans were postponed during the restructuring. In what could be the beginning of a new price war, and as an attempt to maintain its position as the brand leader in China, in August 2005 Shanghai VWĂ˘â‚¬â„˘s made substantial price cuts of between 6 per cent and 14 per cent on its best-selling models such as the Santana and the Gol. This move could have encouraged other car makers to follow suit and reduce prices, given VWĂ˘â‚¬â„˘s important position in the market, although some price cutting had already been undertaken. Certainly, the price cuts emphasized the slump in margins that car makers were facing in China.
General MotorsĂ˘â‚¬â„˘ joint venture also saw sales slip. The main gainers have been foreign rivals such as Hyundai and Honda and domestic car markers, including Dongfeng and Chery. Zhu Junyi, analyst at the Shanghai Information Centre, a government-backed consultancy, felt the move by VW was inevitable, as, compared with cars of the same category, VWĂ˘â‚¬â„˘s prices were fairly high because its labour costs were high. But another industry consultant in China considered VW needed to do something more radical than price cutting. It did not have enough new models. Its two joint ventures did not always work well together and they did not have a competitive cost structure.
It remains to be seen how and whether VW will be able to maintain its leadership in the potentially enormous Chinese market. Clearly, a change in its pricing strategy to cut prices sent mixed messages to customers as well as other competitors in the market for the market leader. Great care to assimilate the other elements of the marketing mix will have to be taken if the leader is not going to lose face in the apparent price downgrade.
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ROVER DRIVERS AND DEALERS FACE SUBSTANTIAL LOSSES IN THE VALUE OF THEIR CARS AND RELATED FINANCING
In the UK, MG Rover dumped an extra 3,000 to 4,000 unordered cars on to its dealer network in the final months before it collapsed in April 2005. The issue was the focus of meeting between dealers and Capital Bank, part of Halifax Bank of Scotland (HBOS), which financed the cars through a triangular deal that released cash to Rover when cars were ordered but left the dealer liable to repay the debt after 180 days.
Alan Pulham, of the National Franchise DealersĂ˘â‚¬â„˘ Association of the Retail Motor Industry Federation, commented that during the last month (March) in particular, but over the last six months to a year, Rover had been transferring financial responsibility for cars to dealers without the cars having been requested. It was commercially naughty but not fraud. What Rover claimed was that they did not think dealers were ordering enough cars and they were helping them (Mackintosh, 2005). The failure of the company left dealers in dispute with the bankers about liability for the debt on the cars, which could be more than Ă‚ÂŁ40m (US$72m). Dealers were considered to be within their rights to refuse to pay, although it was a complex situation with no recent legal precedents.
Rover used other methods to boost its cash flow in its last days, including a bonus scheme whereby Ă‚ÂŁ1,000 (US$1,794) per car sold was promised to dealers on certain types of car. This is standard practice in the industry, but was especially apparent at the end of March and early April. However, dealers who sold cars under the scheme lost out and had to queue up with other creditors in the hope of being paid part of the money they were owed.
Rover also used its own dealerships, branded as Phoenix Venture Motors, which was in administration, to raise much-needed cash through cut-price deals of up to 28 per cent on new cars in March, when the company was on the verge of failure. While dealers lost out on the financing of Rover car sales that did not materialize, so too did the owners of 100,000 Rovers and MGs bought since the beginning of 2004 who faced a sharp drop in the value of their cars as a result of the Rover collapse. This fall may not necessarily be catastrophic or unexpected. Depreciation on Rovers had long been among the most severe in the industry, with a 2002 model 45 being worth only 24 per cent of its original list price in 2005 compared with 33 per cent for an equivalent age and price Vauxhall Astra (Mackintosh, 2005).
The trouble is, the cars were mostly old; with so many good new cars around, why buy a Rover? The fleet people had already taken them right off their lists. So far, there had been a viable dealer network keeping residuals up. But after this experience the dealers were expected to quit and move to other franchises. Growing difficulties in getting parts and service would make things worse, but the cars will always have value. For example, CAP, the motor trade pricing analysis group, projected that a just-purchased Rover 75 would retain about 25 per cent of its value in 2008. Residual values of MGs have been higher, with the MG version of the Rover 45 retaining well over 30 per cent of its value after three years, marginally better than the volume car industry norm. Ă˘â‚¬ËśThe MG is a brand that still counts for a lot; itĂ˘â‚¬â„˘s the Rover brand that has dragged everything downĂ˘â‚¬â„˘ according to Martin Ward, CAPĂ˘â‚¬â„˘s manufacturer relations manager (Griffiths, 2005).
Clearly, a great deal of financial suffering was incurred by the demise of the Rover group. While appearing to operate a premium pricing strategy, Rover had to introduce numerous incentives and price-cutting approaches through its intermediary dealerships to encourage sales and cash flow. Ultimately, these could not be justified and many made substantial losses.