#dieselgate could cause serious collateral damage in China

Audis in China - Picture courtesy germancarforum.com

Germany’s Frankfurter Allgemeine Zeitung raises an interesting point: Dieselgate could hurt Volkswagen big in a country sought immune, and in a market Volkswagen cannot afford to have problems in: China. The recall of 2,000 imported diesel cars in China is not the problem. Diesel is not a factor in China. There are much bigger dangers.

Volkswagen does its China business through two joint ventures, one with Shanghai’s SAIC, and one with FAW in Changchun. Of the joint venture with FAW, Volkswagen holds only 40 percent. After years of negotiations, the Chinese government agreed that Volkswagen raises its shares in the VW/FAW JV to the legal limit of 50 percent. To do that, Volkswagen needs to buy the shares from its partner FAW. The shares will not be cheap. Writes the FAZ:

“We are talking billions. In light of the expected high fines for its emission cheating it remains a question whether Volkswagen can raise a few billions as easily as it could before.”

Tomorrow, VW CEO Matthias Mueller will convene his top managers from around the world, and he is expected to announce drastic cuts to save cash. Already, sources at Volkswagen report that expenses that can be stopped, are being stopped. Negotiated contracts are not signed. Job positions that come open are no longer automatically filled. Uncommitted CAPEX is frozen.

Billions for 10 percent more of a joint venture that worked nicely for nearly a quarter century definitely are in the non-essential category. However, FAW is owned by the Chinese central government. If VW starts reneging on the FAW deal, or if it looks like it can’t afford it, it may lose a lot of good friends in Beijing. China is Volkswagen’s biggest, most profitable, and most promising market, by far.  Volkswagen has enough problems, it can’t afford a big one in China.