BEIJING — In late December 2019, managers at Volkswagen’s headquarters in Wolfsburg, Germany, realized they might have a serious problem in China, the automaker’s biggest market and ticket to its electric future.
VW’s flagship sedan in China — the Passat — did badly in an unofficial safety test carried out by an insurance industry body which simulated a front-on driver’s side collision. The test has been widely used in the U.S. for around a decade.
The car was mangled. The crash-test video went viral, attracting millions of views and triggering a social media furor across China, where VW’s success is built on its reputation for superior quality and engineering.
VW was not obliged to do anything — the Passat had passed the Chinese regulator’s frontal collision test, the same test that is used in much of Europe, and one that the company and many industry experts believe better reflects driving conditions in China.
Nonetheless, Wolfsburg acted swiftly, according to two people with direct knowledge of the matter.
Days after the test results were announced, it assembled a team of dozens of engineers and managers to work with SAIC-Volkswagen, the 50/50 joint venture that builds Passats in China, the sources said.
In early 2020, the team decided that strengthening metal components should be added to the front of all new Passats and a variety of other models made at the Shanghai-based venture, at a cost of about 400 yuan ($62) per vehicle, according to the sources.
That structural modification, details of which have not been previously reported, would amount to tens of millions of dollars for the hundreds of thousands of vehicles that would be affected at the venture a year, the sources said.
It was a significant cost for a company that had said it was trying to trim manufacturing costs in China and globally.
Online consumer activism
The intervention in the face of online consumer activism underlines the importance of China, the world’s biggest car market, and one which VW is relying on to fund its 35-billion-euro ($42 billion) transition to EVs and make good on its pledge to overtake Tesla to become global EV leader by 2025.
Global automakers’ expensive renunciation of oil comes at a time when they can no longer count on the dominance they have enjoyed in decades gone by in China, where they are feeling the heat from local gasoline and electric players challenging them on technology and design.
A VW spokesperson said the company developed products specifically for the Chinese market and that the test failed by the Passat had simulated a head-on collision between two cars, a scenario it said was less likely in China than the U.S.
“In China there are central barriers on the highways,” the spokesperson said. “In China there are not normally as many trucks or pickup trucks compared to U.S. traffic scenarios.”
Asked about the 400-yuan modification, the spokesperson said VW was constantly improving its products according to customer feedback, and to make them safer.
It’s difficult to compare designs of Passats across VW’s markets as they are often fundamentally different vehicles built on different production platforms.
The new Passat in China was the first model to have such a structural modification when it was rolled out in mid-2020, according to the sources. It passed the insurance industry test that its predecessor had failed.
Reputational damage
But the reputational and financial damage has proved more persistent for VW, which has been the top-selling foreign carmaker in China and has made largely healthy profits during its over three decades there, the longest of any overseas player.
VW’s profit per vehicle in the country has fallen from levels of 1,400 euros ($1,640) to 1,500 euros in 2015 to about 1,000 euros and even closer to 800 euros in most recent quarters, according to Bernstein analysts who described China as “of utmost importance for VW’s financial health.”
Sales of the Passat, and more broadly at the venture with SAIC Motor, have slumped — something VW has attributed mainly to the backlash over the failed crash test, as well as product lineup issues and a global chip shortage.
In a sign of the financial pressures facing the industry, one internal memo, seen by Reuters, showed SAIC-Volkswagen’s finance team ordered managers to cut costs at workshops by 30 percent in 2019, versus the year before, when China’s car sales dropped for the first time since 1990s.
VW declined to comment on the Bernstein profitability figures or the internal memo.
Falling vehicle sales
SAIC-Volkswagen’s revenue dropped 26 percent to 174.5 billion yuan last year versus 2019, while profit fell 23 percent to 31 billion yuan.
Sales of the Passat, once one of the best-sellers in its sedan class before the insurance body’s test, fell 32 percent to 145,805 vehicles, according to consultancy LMC Automotive.
While the COVID-19 pandemic clearly played a big role, the decline at the venture was far steeper than the overall 6.8 percent fall in Chinese passenger vehicle sales in the same period, according to data from the China Passenger Car Association.
Moreover, VW’s other main venture in the country, with local automaker FAW — whose products were not involved in the crash test controversy — saw sales rise 1.5 percent, though VW executives say it gained momentum by introducing crossovers and premium Audi models to the market.
The two joint ventures make up the bulk of VW Group’s Chinese business, accounting for all its local production. They have historically been close in numbers of vehicles sold, though FAW has taken the lead in recent years.
There has been no respite for SAIC-Volkswagen in 2021, with sales falling 7.8 percent in the first six months compared with a year earlier when the pandemic raged.
FAW-Volkswagen saw sales grow 23 percent while overall Chinese passenger car sales jumped about 29 percent.
Fractured ‘A-pillar’
The C-IASI test that the Passat initially failed in 2019 was developed by a Chinese insurance industry body, the CIRI Auto Technology Institute, which was unsatisfied with the standard C-NCAP test conducted by CATARC, a government-backed vehicle testing agency.
It said many insurers felt that C-NCAP failed to distinguish in enough detail between vehicles in terms of collision safety and started publishing test results in 2018.
Most foreign car brands received positive results in the C-IASI test, though even those that fared poorly did not receive the online backlash that was aimed at the Passat.
The C-IASI test subjects 25 percent of the car’s front to a head-on impact. It fractured the Passat driver’s side front roof support, known as the A-pillar.
The standard C-NCAP test hits 40 percent of the car front, which allows the impact to be better absorbed.
The CIRI and CATARC did not respond to requests for comment.
In the U.S., a 25 percent frontal impact test is used by the Insurance Institute for Highway Safety (IIHS), a nonprofit group funded by auto insurers. IIHS tests are widely publicized, and automakers design vehicles to pass them as well as federal crash test.
VW’s China chief Stephan Woellenstein acknowledged in January that the failed crash test and subsequent online backlash had triggered the decline in Passat and SAIC venture sales.
Last month, though, he said VW had fixed the problems revealed by the test, that the ructions of the episode had subsided, and the carmaker’s Chinese business was recovering.
“We have once again clearly one of the safest cars on the market in this segment,” Woellenstein told reporters in July. “We will once again take up the old leadership of the Passat.”
But there is quite some ground to regain in the large family car segment.
A total of 47,480 Passats were sold in the first six months of this year in China, some way behind the 91,110 Toyota Camrys and 89,157 Honda Accords, according to LMC.
The figures from the same period of 2019, before the pandemic struck, show how steeply the VW model has fallen away of late: 91,400 Passats were sold versus 111,968 Accords and 85,396 Camrys.
