Speech Bavarian China Day
Prof. Rupert Stadler
Chairman of the Board of Management of AUDI AG
-Check against delivery-
Ladies and gentlemen,
The Bavarian China Day is very appropriate in our museum mobile. This is where we show the history of our brand. And that history has been closely connected with China for more than a quarter of a century. Approximately ten percent of all exports from Bavaria went to China last year. And with all due modesty, we at Audi played a not-insignificant part in that statistic.
As you surely know, we call China our second home. Every third Audi customer lives in that country nowadays. And we are the premium market leader there by a significant margin. Together with Volkswagen and our partner FAW, we operate two plants in China – one in the north of the country and one in the south. We have a research-and-development center in Beijing. And I personally visit China very often. What fascinates me the most is how keenly people there are interested in technology – I’ll talk about that more later.
I would like to discuss three questions today. First: How have we achieved our strong position in China? Second: How do we see the current economic development there? And third: Why do I see an important market of the future in that country – also, and in particular, beyond the matter of unit sales?
Let’s first look back: Our China story started in 1988. Audi models have been driving off the assembly lines in Changchun in the northeast of China since then. Producing there was a bold step: Until then, we had been a very German, or actually very Bavarian company. We built more than three quarters of our cars here in Ingolstadt. The rest were produced in Neckarsulm, also in the south of Germany. And the focus of our unit sales was in Germany, where six out of ten cars were sold; only every tenth car left Europe.
From the heart of Bavaria to China – that was a giant step at first: starting with the language barrier, as well as different patterns of values and ways of thinking. The liberalization process had only just begun. For example, farmers had only been allowed to work on their own account for a few years. It was by no means foreseeable or certain that those tender shoots would thrive. But the potential was there – we quickly realized that – earlier than others, thus becoming a pioneer in an almost untouched sales market.
Statistics tell us that in the mid-nineteen-eighties, every other person in Germany owned a car. In China, there were just two cars per thousand people. But people were starting to demand individual mobility. Another factor is that the car quickly became a symbol of personal success also in China in the more liberal economic climate there.
What did Audi stand for at that time? We experienced an initial strong phase of “Vorsprung durch Technik” with the quattro drive system, with fully galvanized bodies and with top figures for aerodynamics. In the same year in which we went to China, we also launched the Audi V8. That was our first full-size luxury model and practically the great-grandfather of our current flagship, the A8. A first step on our way to becoming a premium brand.
So we had a combination of many positive factors. On the one hand, a country with more than a billion people, which was trying to catch up technically and economically, which had just discovered the automobile, and where the display of prosperity was suddenly acceptable. On the other hand, a progressive brand, which was present in the market at a very early stage, and which was moving up into the premium league.
To date, we have delivered more than three million cars to customers in China. We sold our millionth car there in October 2010. The two-millionth followed in July 2013 and the three-millionth this May. That means: For the first million, we needed 22 years, but we sold the third million in just 22 months. So you see: The fact that China is today our biggest sales market is the result of many years of hard work. I would like to show you that in three areas: the products, our joint-venture partnership, and the people who work for Audi in China.
First of all the products: I have just mentioned how enthusiastic the Chinese are about technology. That’s already a good basis when one wants to communicate our “Vorsprung durch Technik.” But the meaning of “Vorsprung” – or “lead” – is different from one country to another. For example, when I show a business associate a new model in China, it may happen that he or she first takes a seat in the rear – not in the driver’s seat, as we would in Europe. Because in China, successful businesspeople usually leave the driving to a chauffeur and sit in the back themselves. That’s why the A4 and A6 that we produce in Changchun have a longer wheelbase. This gives our customers on the rear seat more legroom.
Or take our new e-tron models. This year, we have presented the second generation of the Q7. We also offer it as a plug-in hybrid, in two versions: one with an electric motor and a TDI diesel engine, and the other with an electric motor and a gasoline engine – especially for China and other Asian markets. Diesel cars are actually very rare in China. Furthermore, we have developed an e-tron version of the A6 with a long wheelbase, our first e-tron exclusively for China, and the first that we will produce locally – as of 2016 in Changchun.
This brings me to the second success factor, our joint venture: You might have heard the saying “production follows the market.” In our case, market entry and the start of local production are in fact concurrent events. Anyone who wants to produce cars in China needs a local partner. We cooperate with First Automotive Works, abbreviated as FAW.
Our first Audi 100 in China was produced under license. But we founded our joint venture shortly after that. In the past five years, we have expanded our local production program enormously. Until 2010, we only produced the A4 and A6 locally. Then we included other models in the program: first our SUV Q5 and then the Q3. And we put a new plant into operation in Foshan. That’s where the A3 Sportback and the A3 Sedan are produced.
When we made that announcement, we could see our dealership investors’ eyes light up. Because compact cars – like SUVs – are growth drivers in the Chinese car market. Our production initiative has given us enormous impetus. Our sales figures have more than doubled since 2010. Last year, we delivered approximately 580,000 cars in China – as many as the total in our first twenty years in the market.
I am often asked, by the way, what more production outside Germany means for our domestic plants. My answer: Anyone who is globally successful can invest locally. More than half of our investment is made in Germany. And with regard to jobs: Our Audi team in Ingolstadt alone has grown by 9,000 people in the past five years.
But back to China and our partnership. Besides local production an effective sales network is just as important. Managing it is anything but trivial in such an enormous country. Until about ten years ago, our sales in China went through two channels: The joint venture was responsible for locally produced models – in combination with Volkswagen models, by the way. And a separate small department looked after imported cars. The result: different contact persons and processes: not exactly ideal conditions for a consistent approach to the market.
We made use of our good partnership and improved it, with a new Audi Sales Division in the joint venture since 2006. Since then, it has managed our entire sales as a distribution center – including the imported models and exclusively for our brand. On this basis, we have greatly expanded our dealer network. From about 120 dealerships at that time to currently more than 400. This allows us to cover more than 170 cities.
But you know as well as I do: Showrooms and factories are only one half of the story. There is no game without a team. We only achieve constant top quality all over the world with highly qualified personnel. That’s why we invest a lot of time and money in the people that work for our brand in China.
For example, we were the first German manufacturer to bring the system of dual training and education to China. Nowadays, we cooperate with nine vocational colleges in the country. We also provide intensive training for sales and service employees. Our two biggest training centers worldwide are in China. We can train more than 10,000 people there each year. On average, every dealership employee spends eight days a year on a training course. That pays off, and important studies show: We are the premium market leader in China also in terms of customer satisfaction.
Ladies and gentlemen, let’s now have a look at the current economic situation in the country. The Chinese economy has recently taken its foot off the accelerator. This year, gross domestic product will grow by only 6.5 to 7 percent. Domestic demand is weakening. Companies’ profits are stagnating. Real-estate prices, which had been rising for a long time, are faltering. On a trip to China this spring, my colleagues and I saw the enormous number of empty new buildings in the periphery. It was immediately clear to us that something had to change.
In this environment, we feel customer reticence also amongst car drivers: The growth of the automobile market has slowed down. In some months this year, it was actually negative. Even the premium market, which had been expanding extremely fast, contracted in May for the first time after a long phase of growth. That was partly because customers in this segment have been particularly affected by the strong falls in equity prices on China’s stock exchanges. You might remember: The Hong Kong index has fallen by a third since the summer, and the Shanghai index by 40 percent.
Some people are now asking themselves: “Is the party over?” Do you know what I don’t like about this view? It’s too short term. As if it was just a matter of making a quick killing. I believe that the example of Audi shows: It’s important to take a long-term approach. And that is as promising as ever in China – despite all the current uncertainty. I’ll give you five reasons for that – but there may well be more.
First: Even with six percent growth, China would still be well ahead of the world’s other major economic areas. And it was clear to all of us that growth rates or around 10 percent couldn’t last forever.
Second: Let’s look not only at relative growth. Ultimately, the absolute figures are what counts. In 2014, Chinese gross domestic product grew by 7 percent or just half as fast as in 2007, when the growth rate was a good 14 percent. But measured in absolute terms in hard currency, the growth was quite similar, and price-adjusted amounted to about 560 billion dollars. So statistics can be misleading!
My third argument applies in particular to our industry: China’s automobile market is by no means saturated. I said previously that when we entered the market, there were only two cars per thousand inhabitants. Meanwhile, there are a hundred. But that’s still well below the 500 cars per thousand inhabitants in Europe. So there’s still a lot of room for further growth.
Fourth: Premium cars are underrepresented in China. Only every tenth car is a premium model there. In comparison: the proportion in Europe is more than twice as high. Demand in China will catch up also for premium products.
Because, and I’m talking about the fifth reason now: The affluent middle class in China is growing continuously. The number of households with an income that makes a premium automobile affordable should quadruple in the next eight years. This was forecast by a recent McKinsey study.
Ladies and gentlemen, I don’t want to play down the current challenges in China. But such situations are part of the business and are normal in the development of an economy. And we shouldn’t let them blind us to the long-term opportunities. We have to keep our hands firmly on the steering wheel. We have to do the right thing today in order to have more success tomorrow.
There’s a lot to do in our industry. Auto-mobility is going through the biggest change in its history. The transformation is taking place on several levels: In the heart of the car, with the question of the drive system of the future. In the interplay between the car and the digital world. And with regard to our customers’ everyday lives. More and more people live in big cities, where we have to thoroughly reorganize mobility. Urbanization, digitalization, new drive systems – all three trends are particularly apparent in China.
China already has the most cities in the world with more than a million inhabitants. Have you heard of Wuhan for example? More people live in the inner city of Wuhan than in Berlin. The Beijing metropolitan area is home to more people than the whole of Australia.
And migration into the cities is continuing. In 2010, only 45 percent of people in Asia lived in cities. The proportion was lower than that only in Africa. The worldwide average was eleven percentage points higher. I don’t need to explain to you what it means when 5,000, 6,000 or more people live and work per square kilometer in urban areas. The pressure to take action is very high simply in terms of air quality and climate protection.
Governments and authorities in China promote so-called new-energy vehicles with various methods: from subsidies on the purchase of electric cars to free parking and dedicated road lanes and preferential registration. Anyone who is allowed to newly register a car in Beijing has literally hit the jackpot. The city allots number plates in a lottery. More than half of them are only for new-energy vehicles – and that proportion is likely to rise.
It’s no secret that China is combining these measures with industrial policy. New-energy vehicles produced in the country enjoy significantly more advantages than imported ones. That of course is also a reason why we are starting local e-tron production. But despite all the projects of encouragement and support: China’s new automotive policy is still in a test phase – with many pilot programs and intensive negotiations. We are taking up this challenge – because that’s the only way to have a say in how it develops.
Ladies and gentlemen, think once again of the traffic in megacities. In Beijing, more private cars are registered than the total populations of Hamburg, Munich, Cologne and Frankfurt combined. This means that driving a car quickly becomes a matter of patience. Driving speeds in Beijing are between 10 and 15 kilometers per hour. Cars move significantly faster even in New York City.
It’s good that new solutions are possible in the era of bits and bytes: For example, traffic flows can be improved considerably when traffic lights and cars communicate with each other. We have already tested such an Audi system successfully. Or take piloted parking. You get out of your car in front of the parking garage and your car does the rest. That saves time for you and space for the city: Parking garages can be made smaller when the doors of parked cars don’t have to be opened.
We see enormous potential also with piloted driving. Especially for safety, because 90 percent of all accidents happen as a result of human error. But also for improved traffic flows. And because the driver can do other things whilst in the car: write e-mails for example. So the car will become a time-saving machine. We are the first manufacturer to drive in piloted mode in urban areas. This May, at the Asia premiere of the Consumer Electronics Show in Shanghai we showed observers all over the world what our system is already capable of in urban traffic.
With regard to digitalization, there is often a real Silicon Valley euphoria. But the role that China plays is often overlooked. Companies such as Alibaba, Baidu or Tencent have the size, speed and disruptive force to change business models. We cooperate closely with Chinese IT giants, like with Baidu CarLife on smartphone integration or with Huawei on high-speed data transfer into the car.
The Chinese government promotes new technologies massively, with research and development for example. Do you know Tsinghua University in Beijing? Being accepted to study there is more difficult than in Harvard or Yale.
The IT sector has contributed enormously to the fact that Chinese companies registered more patents than German ones for the first time in 2013. The country left copy-and-paste behind it a long time ago. An excellent example is the smartphone app WeChat. At first, it was like a copy of WhatsApp – for chatting and sending photos or videos. Today, it’s practically the “Swiss army knife” for everyday use in the digital world – and also the benchmark. In China, I can use WeChat to call up real-time traffic information, to shop, to pay and to do much more. The Chinese are very mobile consumers.
They are also more open minded to piloted driving. According to a study, two out of three Chinese drivers would immediately change over to a fully piloted car. So with regard to digitalization, I say quite clearly: It’s happening first in the Far East.
We are therefore well advised to tailor our local offerings specifically to the requirements of our Chinese customers. Just think how complex Chinese writing is. But the touchpad for our multimedia interface recognizes about 21,000 different characters. When you and your car speak the same language, you have the basis for many digital functions. And we will have a lot more of them in the future than now. In 2020, half of value added in the car and in car-related services will be digital. That’s why those matters are a focus of our R&D center in Beijing. This puts us close to the market, close to our customers. This is where we find out about the latest trends.
And when you now, at the end of my speech, ask me about our key success formula for China, the answer is quite simple: Both the Chinese market and our products are developing very rapidly. That might involve risks, when one rests on one’s laurels. But I personally, and we at Audi, see enormous entrepreneurial opportunities here. And we intend to utilize them. One mustn’t hesitate, but must grasp those opportunities with both hands. And above all, one has to be ready to reinvent oneself again and again. We have always managed that in China. And we will continue to do so.
Jürgen De Graeve
Tel.: +49 841 89 34084