FAW-Volkswagen Audi: An Overall Definer of “Luxury” Cars in China

(2001–2011)

Author: F. Warren McFarlan, Jie Jiao, Shanshan Cao, Shuo Miao & Hao Jiao
Publisher: Tsinghua University School of Economics and Management
Publication year: 2016
DOI:http://remote-lib.ui.ac.id:2087/10.4135/9781526490605

Abstract

The FAW-Volkswagen Audi “trilogy” case describes Audi’s development history in

China and the problems it faces currently, as well as demonstrating the strategies
employed by FAW-Volkswagen Audi in their thirty year business partnership. Between
2001–2011 FAW-Volkswagen Audi launched the “localization of the whole value
chain” strategy, that is, localization in product development, procurement, production,
marketing and other sectors. This strategy further guaranteed product quality while
effectively reducing costs. The case focuses on how Audi responded to increased
competition in the Chinese auto-industry, especially from other German car brands
such as BMW.

I. China’s Auto Market During This Period

(A) China’s Economic Growth, Change of Income and Consumption Habits

In 2001, China officially joined the World Trade Organization (WTO), announcing to
the world that China would become an important member of the global economic and
trading system. Joining WTO brought enormous benefit to China, expanding its trade
scale rapidly, attracting the injection of foreign investment and further propelling the
Chinese government to carry out vigorous economic reform and operational
improvement of institutions. From 2001 to 2010, Chinese GDP grew at an annual rate
of over 10% creating many employment and investment opportunities. The domestic
market was prospering.

Meanwhile, people’s living standard had also constantly improved. In 2000, the per-
capita disposable income of urban residents was 6,280 yuan. By 2010, the figure had
increased to 19,109 yuan, more than three times that of ten years earlier. (See Exhibit
2) After meeting the basic requirements of daily life, people wanted higher-levels of
consumption. 2003 was a year of a minor blow-out of the Chinese auto market. Along
with the rapid growth of auto sales, cars which had been previously regarded as
luxuries started to enter households. In this year, the proportion of private car buyers
exceeded 50% for the first time, making them the biggest consumer group of cars.
China had stepped into an auto age. Private car purchases became a major force of
car consumption, helping the Chinese auto market maintain a high-level growth.
Against this backdrop, auto manufacturers’ launch and promotion activities for new
car models were rolled out one after another.
(B) National Policy and Change of Market Environment

Before 2000, the Chinese auto industry was mostly populated by state-owned
companies and trans-national joint ventures, with cars mainly oriented to the
government market and the social elite. Market demand was limited. The opening of
private car purchases and improvement of people’s living standard, enabled the auto
market to grow. After 2001 when China accessed into WTO, the Chinese government
formally introduced private capital into the auto industry. In June 2004, China’s new
automobile industrial policy was formally launched, clearly committing to both
vigorously develop products with independent intellectual property rights and
implement a brand management strategy. A central economic working conference
held in December of 2004 stated that “enhancing innovative ability is a key link for
pushing on economic restructuring.” Proprietary automobile brands have become of
great importance and have the support of the government. The central government
carried out on adjustment of a series of policies related to finance and taxation,
providing support to domestic auto manufacturers. These changes brought pressure
to create large joint ventures.

(C) Full Access of Rivals

The rapid expansion of market scale, the blow-out growth of consumer demand and
the change of relevant policies and regulations enabled auto manufacturers at home
and abroad to realize great success in the Chinese auto market. In that context, well-
known foreign-funded auto manufacturers such as BMW, Mercedes-Benz, Toyota and
Lexus etc. increased their investment in the Chinese market and gradually shook
Audi’s dominant position in China. Meanwhile, some proprietary Chinese brands such
as BYD, Chery, Geely and Brilliance etc. started to grow up by virtue of favorable
government policies.

To meet the increasingly growing market scale, the rivals of Audi adopted strategies
of expanding production, increasing investment and quickly seizing market share.

The competition first came from the local Chinese auto manufacturers. The home-
made proprietary brand auto manufacturers by introducing foreign technologies and
equipment, improved R&D enhanced personnel training etc., and consequently grew
significantly. For example, Chery completed the investment and construction of Phase
I and II of its production base in 2003, with annual output of 400,000 engines and
300,000 vehicles; BYD purchased Xi’an QinChuan Motors in 2003, and built a
production base in Xi’an producing 200,000 vehicles in 2005. Some key parts of these
home-made models were directly purchased from trans-national auto manufacturers.
For instance, some models of Geely installed engines made by Toyota. Chery used
engines also installed on the MINI COOPER and other world top-grade vehicle
models. This strategy “associating with well-known part suppliers” created an image
of advanced technology and reliable quality for home-made brands. 2

Great pressure also came from traditional competitors. In May 2003, Brilliance BMW
Automobile Ltd. was registered and incorporated. In December 2005, the first batch of
home-made cars manufactured by Beijing Benz Automotive Co., Ltd came out. Two
major international rivals accelerated their localization and continuously sought to
catch up with Audi. After localization, BMW launched a series of direct or indirect
confrontations in front-drive and rear-drive designs becoming sponsor for the Boao
Forum and starting a price war. While “sitting on top of the mountain watching the
tigers fight”, Benz has also made its efforts to enhance its own strength.

The debut of BWM in China was in the 1980s. In April 1994, BMW AG officially entered
the Chinese mainland market and set up its Beijing Office. In 2001, the sales of BMW
in China were only 5,742 units. With China’s entry into WTO and demand growth of
domestic consumers for luxury cars, BMW AG actively responded. In December 2001,
BMW AG and Brilliance China Automobile Holdings Ltd. submitted a proposal for a
sino-foreign joint venture. In 2003, the joint venture Brilliance BMW Automobile Ltd.
was officially incorporated and started operation. Since October 2003 when the first
home-made BMW car was released, Brilliance BMW launched a great variety of 3
series and 5 series models with different configurations such as BMW330i,
BMW530Li, BMW520Li and BMW523Li etc. successively over two years. Especially
in September 2005, the new BMW 3 series and 5 series cars were launched almost
at the same time with those in international market, setting new standards for cars of
the same level. In addition, Brilliance BMW also introduced the X1, import BMW 1
series, X5, X6, mini and other models.

However, after starting the localized production, BMW failed to achieve a sharp
increase of sales in China but rather saw its sales drop by 15% over 2003, with the
China-made BMW only accounting for 55% of the total sales. Given the situation,
BMW AG started to reflect. Christoph Stark, the then CEO of BMW (China), decided
to adjust the strategy in China, changing the previous “not cutting price in the world”
into a “special price for China”. From 2004 to 2012, BMW initiated multiple key
strategies of “localization” such as product lengthening etc., accelerated introduction
of models, promotion of development of localized models, keeping up with the Chinese
market and making timely adjustments for adapting to the need of markets.

On the other hand, since 2004, a series of events happened in China, which damaged
the brand image of BMW. BMW’s brand image of success in the developed countries
market was distorted accidentally. To solve the problem, BMW had to reshape its
brand image in line with Chinese conditions without losing the original connotation of
the BWM brand. BMW AG proposed a new brand concept—JOY is BMW in 2009 and
initiated a new brand strategy with “BMW JOY” as the core in its high profile plan for
reshaping BMW brand in 2010.

Facing increasingly severe environmental problem, BMW implemented a series of

sustainable development strategies aimed at environment improvement and green
commuting such as building green and environment-friendly plants and developing
new energy power-driven vehicles. BMW AG was also selected as an auto
manufacturer with the most sustainable development power in the world by the Dow
Jones for years. 3

The period between 2009 and 2011 was one of great market development for Chinese
high-level vehicles. BMW reaped enormous benefits in China. In November 2009,
Brilliance BMW announced a production expansion increasing the investment. In the
same year, the total market sales of BMW and MINI brand CARS broke all sales
records, with total sales rising by 38% over that of 2008 and the growth rate exceeding
the average level of luxury car market. By 2011, the total sales exceeded 230,000
units. While reaping enormous profits, growing the production capacity of Brilliance
BMW was hard. The contradiction between huge demand and supply capacity began
to emerge. 4

Another luxury car brand Mercedes Benz formally established Daimler Chrysler Van
(China) Ltd. for expanding its business in China. In August 2005, Beijing Benz
Automotive Co., Ltd. was set up. The joint venture was incorporated by Beijing
Automotive Industry Holding Co., Ltd., Daimler AG and Daimler Northeast Asia
Investment Co., Ltd. for manufacturing two series of models, the C-class and E-class
as Mercedes Benz’s development in China reached a new stage. At the end of 2006,
the China Headquarters of Mercedes Benz moved from Hong Kong to Beijing and was
renamed as Mercedes Benz (China) Auto Sales Co., Ltd. Taking wholesale business
as a leading industry of the joint venture, it is responsible for importing the full series
Mercedes Benz cars into China and managing auto brand, sales, distribution and
service to further support Mercedes Benz’s business in China.

To meet the diverse demand of the domestic market, Mercedes Benz intensified its
efforts in product imports. By 2012, the products of Mercedes Benz available for sale
in the Chinese mainland covered: S class top-class luxury car, C class car, E class
sedan car, off-road vehicle and station wagon etc.; in addition, high-performance
brand AMG, Smart and ultra-luxury Maybach and other series models, formed an
overall luxury car product portfolio in China. In 2011, the sales of Mercedes Benz in
the Chinese market were slightly less than those of Audi and BMW (see Exhibit 3).

As positioned as a luxury car, Mercedes Benz is less favorably priced compared with
Audi and BMW. The localized price of Mercedes Benz cars has also lagged behind
Audi and BMW, causing quite a few Chinese consumers to avoid Mercedes.
Additionally, in the eyes of consumers, Mercedes Benz brand has been a
representative of luxury. Such a brand image has become a bottleneck restricting the
development of Mercedes Benz in China. Facing such a situation, Mercedes Benz,
while maintaining its original target market, started to turn its attention on young
consumer groups. The young and stylish elements of Mercedes Benz began to be
accepted by more and more consumers. In 2007, Mercedes Benz kicked off its
strategy of “Young Benz” in China. The product price has also room for choice and
fully met the demand of consumers from different classes.

Mercedes Benz practices a global standard service system in China. By 2011, it set
up nearly 200 authorized sales and service centers adopting global unified standards.
Along with the continuous growth of market demand, the dealer network expanded
year by year. To meet the timely and rapid service standard, parts distribution centers
were set up in the four cities of Beijing, Shanghai, Guangzhou and Yangzhou.
Moreover, it has also established “Mercedes Benz Center” in the three cities like
Beijing, Shanghai and Guangzhou to train employees for dealers. Meanwhile, active
involvement in public welfare undertakings has also been a key work for Mercedes
Benz in China. The establishment of “Mercedes Benz Star Wish Fund” in the second
half of 2010 was a new benchmark of Mercedes Benz in Chinese public welfare
undertakings. 5

Being confronted with aggressive rivals, the core strategy of FAW-Volkswagen Audi—
localization of whole value chain has played a vital role in allowing FAW-Volkswagen
Audi to maintain its dominant position in the Chinese market for the long term.
II. Competition Strategy of Audi—Localization of Whole Value Chain

From the moment Audi entered China, it was confronted with fierce competition from
rivals. The rapid development of the Chinese economy and the continuous expansion
of Chinese auto market capacity had made China a hotly contested spot. Facing the
changing market and the intensification of competition, FAW-Volkswagen Audi
retained its original intention of “only making high-quality vehicles” and continued to
enhance its competitive strength in manufacturing, product, brand and organizational
structure. The key for continual enhancement of competitiveness is implementing the
strategy of “localization of whole value chain”.

Since 1989 when the first Audi 100 was rolled out in China with output falling short of
demand, there was great conflict between production and sales. As the old saying
goes, do as the Romans do. After entry into China, Audi had to face a series of “going
native” puzzles in localization of production, product, marketing, management and
brand etc. Fortunately, both sides of the joint venture had a strategic vision and
showed great cooperation and sincerity in the course of business development.

Since the cooperation was kicked off, FAW was fully aware that only making the most
of local resources for producing and operating Audi cars could achieve the maximum
interest of the Chinese side. Localization strategy was one of them. More important
was enhancement of the overall level of the Chinese auto industry in whole value
chain, i.e., “localization of whole value chain”. “Localization of whole value chain”
meant moving to achieve localized R&D, localized procurement, localized production
and localized marketing (see Exhibit 4) on the basis of Audi’s global unified standard.
For Audi, attaining the “localization of whole value chain” based on Audi standards
enabled it to fulfill the maximum economic interest of China. Therefore, FAW and Audi
sought common ground realizing that attaining the “localization of whole value chain”
based on the Audi standard was in the fundamental interest of both sides and also an
optical choice of both partners.

In the wake of continuous expansion of Audi in the Chinese market, while FAW-
Volkswagen Audi maintained its superiority of first-mover, it has also constantly
pursued improvement and perfection, continuing to enhance its own core
competitiveness comprehensively. FAW and Audi joined hands to create a FAW-
Volkswagen Audi model with “localization of the whole value chain” on the basis of
Audi’s global unified standard and taking a dominant position in the contest with rivals
by relying on accurate brand shaping, localized product strategy oriented to users’
needs and high-quality dealer network system.

(A) Localization of R&D and Production

During the localization of R&D, the technical personnel of the Chinese partner could
get involved in the secondary R&D of products, cultivating a group of backbone
employees. Take the new Audi A6L as an example. In 2007, when Audi initiated the
product start-up, FAW-Volkswagen Audi Business Division joined in. From 2007 when
the project was initiated to November 2011 when 170 units of new generation A6L
model were pre-produced, the Chinese side was fully involved in development,
planning, production, quality control, logistics and other links. Over five years, 370
persons from Chinese side participated in the whole process of developing the new
A6L. The training duration for each person at Audi’s headquarters was at least a
month. Even some Chinese staff took offices in different posts of Audi’s headquarters.
Audi was proud of its model of “localization of whole value chain” featuring full
involvement in the whole course. The significant increase of two key rivals of Audi like
Mercedes Benz and BMW in sales mainly relied on increased demand in the Chinese
market. The Chinese side continuously lobby the headquarters for distributing more
global resources. At all stages, however, no product development consultation took
place as appropriate.

Audi’s target of production localization was to ensure the manufacturers’ technical

equipment level, spot management level and labor productivity reached the world-
class standard; the target of procurement localization upgraded the quality standard
of all the people inside the whole production system and further spurred the
improvement of all supplier system standards. Audi now possesses rigorous
inspection system for all spare parts and materials to ensure the suppliers of parts and
materials perform in line with internationally first-class level.

Chunyu Xianzhao, the board chairman of Changchun East Die-casting Co. recalled,
“At that time, we wanted to deal with certification for the engine support of No. 207
matching the Audi A6. As voids were likely to occur during the die-casting of castings,
which not only relate to the quality of individual products, but also directly affects the
driving safety, Audi requested us to provide CT photographs of relevant components
for viewing if there are any gaps. At the time, we felt it incredible and
incomprehensible, thinking that Audi was overcritical of us.” 6 As a matter of fact, the
success of Audi in the Chinese market lay in technical innovation and its strict
requirements on both the suppliers and itself. From the Audi A6, Audi A6L to all
subsequent models, the products of Audi did not reduce their quality standard for
localization. In this aspect, both Chinese and German sides had clear thinking, i.e.,
quality first and cost second.

By introducing Audi products in succession, the domestic employees also changed

their attitude for process quality control from passive acceptance to active learning,
with product quality and employees’ capacity being greatly enhanced. Through the
whole process of Audi’s localization, FAW people felt the German’s rigorous and
almost harsh quality standard. Audi was uncompromising in quality standards. From
Audi’s perspective, catching up with rivals meant doing better than the rivals. Just
under the incentive of rival’s competition, Audi was seen as the most trustworthy brand
to Chinese consumers. Meantime, it grew to be “the sole mature high-grade luxury car
manufacturing base brand of China”.

Mr. Yu Qiutao, Deputy General Manager of FAW-Volkswagen Audi’s Sales Division,

said with a sigh, “The mode of import by joint venture and cooperation has made a
great contribution to China’s auto industry, parts manufacturing industry and even
material process etc. Without the joint venture and cooperation as well as its
collaboration with Volkswagen and Audi in those years, China’s current industrial level
and manufacturing industry level might remain in a backward state.”

In pushing on “localization of whole value chain”, a number of parts enterprises have

reached Audi’s quality standard. They not only supplied parts for Audi, but also got
involved in development of localized Audi, even international luxury brand products;
some enterprises have developed from small workshops to transnational parts
producers and have even participated in the development of standards in relevant
fields in China. They have played an enormous role for FAW and China’s improvement
of proprietary brand product R&D and built a foundation of a modernized parts
industry, with its influence being far-reaching and profound. By the end of 2012, the
total number of FAW-Volkswagen local parts suppliers hit 519, of which 180 suppliers
are pure Chinese-funded enterprises (private or state-owned enterprises). Moreover,
in 2000, the first local parts supplier fostered by FAW-Volkswagen Audi went abroad
to be Audi’s global sourcing supplier. By 2013, 60 local suppliers (26 Chinese wholly-
owned enterprises) had access to Audi’s global sourcing system and gotten involved
in global parts competition.

All the enterprises which provide supporting service for Audi have felt the high
standard requirement for Audi’s products and also seen the professional dedication of
Audi’s staffs. During its communication with supporting suppliers, Audi always helped
them jointly consider and solve problems, leaving a deep impression on the supporting
enterprises.

To date, Audi has achieved more than 60% in model localization rate. For individual
models, the localization rate has even exceeded 85%, achieving localization of both
parts production and assembly. The highly localized production proportion has not
only enabled Audi products to gain cost advantage in price war, but also greatly
shortened the time from production to final sales, allowing FAW-Volkswagen Audi to
accurately grasp the market’s fluctuation and rapidly take specific counter-measures.

(B) Accurate Product Strategy

At this stage, Audi took the initiative to make an overall layout for its product lines in
an effort to achieve a full coverage of its product lines and localization of its whole
product lines (see Exhibit 5).

The launch of Audi A6 (C5) caught the fancy of consumers. However, along with the
conversion of brand image and change of user needs, FAW-Volkswagen Audi urgently
needed to expand the coverage of product lines to meet the demand of consumer
groups at different levels. After launching the A6, Audi also introduced the A4 to cater
to the SUV users, Audi introduced Q7 and Q5 to meet the needs of young people and
female users. It also imported the Audi Q3, A3 and other models. Meanwhile, it also
endeavored to enrich the colors of models to change its previous style of black and
gray as main tones. For instance, the Hainan blue color customized for Chinese edition
A3 was acclaimed by the market.

“The second decade of Audi’s development in China was mainly focused on the
market demand and the start of importing a lot of products. While extensively
introducing products, we needed to consider factors like: Was the product suitable for
the Chinese market? What price should the product be set at? What products should
be developed? How to develop? There were some conflicts between the Chinese team
and German management. Both sides argued about whether the product should be
customized to the Chinese market; what accessories should be available, and so on.
The alternatives were quite plenty at that time,” said Yu Qiutao. “In that period, we do
projects every day. The economy management committee of Audi and even
shareholders paid close attention to how the projects progressed, whether they could
be completed as scheduled, what the products were like, whether they were
competitive and achieved their performance on the market.”
In April 2003, Audi formally launched A4 (B6), the second local model made in China.
The launch of the Audi A4 followed the concept of “the same planet, the same Audi
and the same quality” and further consolidated and enriched the brand image of FAW-
Volkswagen as the first high-grade luxury car manufacturing base of China. The A4
products entering China at the initial stage were not lengthened like A6. In the
Germans’ opinion, the A4 was smaller than the A6, so it was not required to be
lengthened and if done might increase the cost. But such a model met its Waterloo in
China initially. In this case, the Chinese side contacted German side and organized
several discussions on whether A4 should be lengthened or not. The dispute between
both sides was concluded by respecting the opinion of Chinese side and lengthening
the A4 model. The lengthened Audi A4 (B8) achieved a sharp sales increase.

In addition to lengthening, for meeting Chinese users’ pursuit of high-grade and

complete configuration of sedan cars, the Audi A4 1.8T model has been equipped with
a revolutionary multitronic stepless/manual integrated gearbox. 7 Compared with
“elder brother” Audi A6, the standard configuration of the A4 also included ESP
electronic anti-skid brake system, safety airbag, 6-disc CD player, multi-function
steering wheel and leather power seats etc. The combination of many hi-tech
achievements under human-oriented design allows the power, controllability, active
and passive safety and comfort of the Audi A4 to reach a new height so as to make it
be a high-grade B class sedan with advanced technology, luxurious configuration and
outstanding performance.

In April 2005, the new home-made Audi A6L (C6) was launched in Shanghai. The
home-made new generation A6L continued A6’s lengthening strategy, with 100mm
lengthened over the global edition model. Given the previous experience of the A6
lengthening negotiation, a consensus of cooperative development was reached
smoothly between Chinese and German sides. In the same year, the Audi brand
achieved outstanding sales performance in China, rising by 9.6% over the previous
year and making China the third largest market of Audi outside Germany.

The lengthening of Audi A6 ushered in the tide of sedan cars at this level in the
Chinese market. As a major rival of Audi, BMW AG developed the BMW 5 series Li
model specially for the Chinese market in October 2006. The new model was
lengthened by 140mm and the total length of wheelbase exceeded 3m. Another high-
grade sedan manufacturer Mercedes Benz also lengthened its new generation E class
model launched in 2009 to meet the Chinese users’ “special need”. Although the rivals
emphasized that the change of such a strategy was a result based on market
investigation, undeniably, Audi’s “lengthening” strategy of product localization feature
on the Chinese market had a great impact on the rivals.

On September 12, 2005, at the 61st Frankfurt International Motor Show (IAA), the first
top-grade sports utility vehicle (SUV) Audi Q7 of Audi brand made its debut, marking
Audi’s formal entrance to the SUV market. In July 2006, the Audi Q7 was formally
launched in China. As the first third-generation SUV in the world, the Audi Q7 was also
equipped with the exclusive quattro® AWD system, which featured outstanding
motility and dynamic design. The excellent performance even on ordinary highways
and off-road surfaces, its top-grade comfort property and genuinely ultimate luxury
quality have reflected Audi’s brand concept of “technology-guided innovation” and the
brand value of “honor, dynamic and enterprising”.
In March 2010, the first high-grade SUV model made in China, the new home-made
Audi Q5 was launched. Q5 not only expanded the product series of Audi brand SUV
model, but further strengthened the enterprise’s position as “the most powerful luxury
car production base in China”. While introducing the Q5, Audi had a different idea
compared with the introduction of the A4. At that time, there were few SUVs, especially
few high-end luxury SUV models in the Chinese market. FAW-Volkswagen Audi
believed it to be a new point of market growth in the future. On the other hand, since
it was a sports off-road vehicle, the major concern of demand did not lie in the comfort
and spaciousness of the rear seat, so the Audi Q5 was introduced into China without
being lengthened. Such perceptive thinking conformed to the Chinese market and
consumers’ needs at that time.

As a whole, the home-made edition of the Audi Q5 was not changed a lot compared
with the imported edition but had some adjustments in detail for the Chinese market.
Compared with the imported edition the home-made edition Audi Q5 had a “docile”
front exterior. The grille canceled chrome trimmings. The style design around the fog
lamp was fine-tuned. The design of the front baffle was also adjusted and the major
lines were refined, giving a delicate feeling. The concise, bright, stylish and dynamic
design of the home-made Q5 won over the consumers. The Audi Q5 became a “magic
car” following the A6 and its sales increased year after year.

By 2010, the total sales of Audi models exceeded 1 million, including 900,000 home-
made Audi cars. FAW-Volkswagen had become one of the most heavy-weight
production bases in Audi’s global network. For FAW, the importance of carrying out
local adaptive development of the Audi high-grade models not only lay in its market
value, but on the number of technical personnel trained during development. Chinese
personnel only got involved to a small extent on the Audi A6. But, by the A6L, more
Chinese technical personnel participated in more work during the localized R&D.
FAW-Volkswagen repeatedly dispatched R&D personnel to German Audi AG for
training, learning professional knowledge and skills in product, production,
management and other fields. In turn, they were then assigned to the company’s
operation and development and went on to make a great contribution to the product
development of the FAW proprietary brand and other proprietary brands.

(C) Sales Channel Strategy

Along with rapid expansion of Chinese auto market demand, the dealer network
system of FAW-Volkswagen Audi also developed rapidly. Through long-term
cooperation, a relationship had been formed between the main unit plant and dealers.
Compared with FAW-Volkswagen’s previous products, Audi A6 had established an
independent marketing network. The period of 2000–2011 was a start-up stage of
network building for FAW-Volkswagen Audi. To form the Audi brand influence, the
enterprise recruited dealers oriented to the society who mainly adopted the mode of
4S and single service. By 2003, the network system covered all provinces except
Tibet. (See Exhibit 6) After 2011, network building grew rapidly. Though the effort to
recruit employees from all over society was great, the quality of dealers was uneven.
To improve the quality of the network as quickly as possible, FAW-Volkswagen
adopted a policy of choosing from the existing dealer network system. The dealers of
intranet system had mature building experience and management experience, so new
stores could be built and put into operation rapidly. During this period, 21 core strategy
dealer groups were formed in FAW-Volkswagen Audi, continuously pushing forward
the rapid development of the newly-built network.

Between 2003 and 2005, the main rivals BMW and Mercedes Benz started their
localization successively, intensifying the competition of domestic high-grade sedan
market. To deal with the challenge facing home-made Audi models under the new
situation, both FAW and Audi believed they should adjust and upgrade the existing
organizational structure. In January 2006, FAW-Volkswagen Audi Sales Division was
set up, which brought a striking change to Audi’s business in China: integrating the
personnel, brand promotion and imported vehicle business of Audi China into the Audi
Sales Division. The after-sale service of home-made Audi was changed from a state
of mixed management with home-made Volkswagen vehicles into separate
management of the Audi Sales Division. All along, the weakest point of Audi had been
a weak brand image over the rivals, forcing the price of home-made Audi products to
be lowered. As a result, the price gap between domestic Audi models and rivals’
models was greatly different from that in European market, which affected the
profitability of FAW-Volkswagen Audi. By integrating the sales channel of imported
brands with that of home-made brands, the channel of home-made models drove the
sales of imported models. , Through networking to increase the variety of imported
Audi models, Audi was able to change the ever-lasting official model image, enrich
and enhance the overall brand connotation and promote the sales of home-made Audi
models.

After the establishment of Audi Sales Division, it set up the network development
department, with the main functions of planning and building of the network, including
providing training to the dealers in quality management and business capacity
upgrade. Along with continuously enriched product lines and constantly optimized
management process, the management standard also changed. The establishment of
network development department could also carry out more refined management for
adapting to the need of development in a new period. After 2013, the company
upgraded the original network development department into a new network and
training department, which consisted of the network development department, the
network management department and the training department. The network
development department would focus on planning, selecting, building and
development of the network; the management department and training department
would be more concerned about the upgrade of network capacity. This adjustment of
the organizational structure would be able to cope with an increasingly intense
competitive environment. 8

From the perspective of FAW-Volkswagen Audi, the relationship between producers

and dealers was not only that of different links of industrial chain, but also an
interdependent interest community. Deputy General Manager of FAW-Volkswagen
Audi Sales Division Wang Guoqing noted, “Presently, the relationship between
dealers and main unit producers is quite different from the relationship in the past,
which was represented by Party A and Party B. The main unit producers had a
dominant position while the dealers had to obey the management of main device
producers. For a period, their relation was just like an inseparable couple. But, now,
the latest saying is that dealers are “arms of main unit producers”. FAW-Volkswagen
Audi has really realized the importance of dealers, making them consider the issues
from the perspective of the partners, concern about the interest of dealers and create
a favorable condition of win-win result for relevant parties. To ensure the dealers
operate stably and effectively, FAW-Volkswagen Audi has practiced and strengthened
producer relation management strategy gradually. Based on such three levels as
division, region and business, communication and exchange are performed among
investors of both sides, executives and employees on regular basis. FAW-Volkswagen
Audi obtains feedback information in a timely fashion and help the dealers solve any
problems quickly.

(D) Brand Marketing Strategy

“Honor, dynamic and enterprising” remains the core value and abiding gene of Audi
brand. The founder of Audi AG August Horch once said, “I am determined to only
make vehicles of strong power and high quality.” Even through ups and downs after
the Second World War, Audi people remained committed to such a brand positioning.
The success of Audi in China for 20 years has never stopped Audi’s unceasing pursuit
for such a brand spirit. Along with the launch of the A6 (C5), the official car image
formed under a special market mechanisms in China has also pushed forward the
expansion of FAW-Volkswagen Audi in the business and private car market.
Meanwhile, the producer has also been clearly aware that, without the success in the
official car market, there will not be success in other segment markets and rich brand
connotation; however, if you want to make Audi into a genuine international leading
brand, the continued painstaking emphasis on its official car image will not be wise.
Mr. Fan Wei, Deputy General Manager of FAW-Volkswagen Audi Sales Division
recalled, “We cannot say that the previous sale of Audi was dominated by official
application, but it was inevitable to have an image of official car. However, along with
the reform of national policies, including the reform of business cars, such a condition
will be gone forever.” The image of official car made Audi to occupy a favorable
position for a specific period. As private cars became mainstream, customers became
more mature in mentality and individual needs became more prominent, the active
move of Audi in changing its brand image further enhanced users’ acceptance to Audi
products.

Along with the continual abundance of products and the joining of rivals, Audi’s brand
image and user positioning has also experienced a process of continuous adjustment.
After Audi A4 and other entered the Chinese market gradually, the product elements
became more abundant. Audi’s brand positioning has also returned to the most
authentic, i.e., “honor, dynamic and enterprising” three core values, catering to the
concept of young people and successful people. With both the media and public, Audi
had been publishing the brand standing for “Innovation is guided by technology” and
“honor, dynamic and enterprising” as well as “high-grade car dealer network with the
largest size, the highest standards and the best service domestically”.

In user positioning, Audi has also experienced a great adjustment. The user
positioning firstly changed from “successful people in all walks of life” in the Audi A6
age to “social elites.” It then transformed into “social mainstream elites” for the purpose
to distinguishing them to rivals. The respective user positions of other models were
further subdivided on this basis. It not only reserves the common characteristics of
brand user groups, but also presents the distinctive features. Through discussion and
adjustment for several times, the user positioning of FAW-Volkswagen Audi brand has
been defined as “successful and understated; dynamic, enterprising and groovy social
mainstream elites”. The sales data of FAW-Volkswagen Audi brand show that less
than 3% are official vehicles and business vehicles and around 97% are private cars.
The old image of the Audi brand has been turned round.

Among high-grade brands of China, Audi has also taken the lead in launching the
typical long-term brand promotion plan—“Audi Vorsprung Circle.” It invited the
internationally acclaimed conductor Yu Long, young piano mater Lang Lang, Yue-Sai
Kan who is honored as envoy of communication between China and the west, Hong
Kong movie star Maggie Cheung, media celebrity Yang Lan et al. as image
ambassadors in an attempt to associate the features of Audi products with personality
of different users to reveal Audi’s brand image more clearly and more accurately
communicate with different segment markets.

To build up the high-end brand and user group image, Audi planned and sponsored a
series of activities in China. In 2002 and 2003, FAW-Volkswagen Audi as the sole
sponsor of the VIP car provider designated by the previous two Boao Forum for Asia,
formally proposed the concept of “manufacture base brand”, further enhancing
people’s identity of globally consistent quality to Audi products. FAW-Volkswagen Audi
proved that Changchun is fully capable of producing high-grade luxury cars with world
first-class quality. In October 2003, Audi turned the expression into “the first mature
high-grade luxury sedan manufacturing base brand in China” to highlight the
advantages of Audi over rivals.

In 2004, BMW entered the Chinese market in a high profile and sponsored the Boao
Forum for Asia. Other foreign-funded brands also found the potential of the Chinese
market and accessed to the market one after another. The competition in the Chinese
auto market intensified. Audi cut its price for the first time in late 2004. Under the
pressure, Audi also stepped up its brand promotion campaign in China. In February
2004, Audi invited domestic major media to visit Audi headquarters and the Audi
museum, which showed the long history and blue blood of Audi cars. Along with the
advent of multiple models like TT and Q7, Audi also got more involved in sponsored
activities of sports, art and vogue such as the contests of European football club Real
Madrid, Barcelona and Manchester United in China, China Fashion Awards, Beijing
Music Festival and the opera Der Ring Des Nibelungen etc. The purpose of all of this
was to build and maintain a positive and high-end brand and user group image.

In the localization of marketing, FAW-Volkswagen Audi used Chinese staff as a

leading force. They laid down specific marketing strategy according to German
concept and model and then tailored it together, their understanding, perception and
judgment on the domestic market and consumers. Fan Wei also mentioned, “For the
joint venture model, both sides have different ways of thinking, including values and
inclination, so conflict is inevitable. At that time, the salesmen on the Chinese side
really had a better understanding on the changing market. The experience of Germany
was it was hard to cope with the Chinese market.” Such a “mixed marketing” mode is
based on both sides’ advantages, which effectively allocated resources to both the
Chinese and foreign sides. The Chinese side gave full play to its advantage of knowing
well the Chinese market. The German side also paid close attention to China’s special
national conditions and gave sufficient trust to Chinese colleagues.

(E) “Customer Supreme” Full Service Strategy

FAW-Volkswagen Audi strictly abode by the core service concept of “taking user
satisfaction as the center”. “While doing everything, the ultimate goal of Audi is to offer
service for users and meet the demand of end users; dealers are family members
while users are the source of our food and clothing, so we should never give up users.”
said Wang Guoqing. In 2002, FAW-Volkswagen Audi set the service concept of “taking
customers as the center” and established the customer relation management
department. This department integrated service, technology, telephone, network and
complaints. The service tenet focuses on customers and boosting customer
satisfaction as a goal. The main duties are to collect, sort out and analyze customers’
information to understand customers’ different needs. The customer hotline deals with
customers’ inquiry, reminding and complaint etc. The customer relation management
department tries to establish a close contact with customers and keep interactive all
the time. While talking with customers, the working personnel provide some basic
knowledge such as performance, attendance and maintenance of automobile etc. to
customers. While providing these services for customers free of charge, the brand
image is also being publicized herein.

Meanwhile, it established a set of sound service system, including basic service

system, supporting service system and service assurance system through continuous
effort of the network and training department. The basic service system established
the most fundamental and the lowest level service oriented to some hardware,
personnel and company’s overall image; the supporting service system was looked
after the finance and insurance service after sales of vehicles; the service assurance
system was responsible for management of 4S stores and unified training to
employees etc. The overall purpose was to constantly adjust the standardized process
in line with market change, elevate the sales skill and service experience of the
dealers’ employees and provide better service to users.

FAW-Volkswagen Audi always paid attention to users’ needs. In both sales field and
after-sales service field, the enterprise’s user satisfaction has been the industry leader.
From 2000 till now, its scores of JD Power CSI (Customer Satisfaction Index) and JD
Power SSI (Sales Satisfaction Index) topped the table for consecutive years. (See
Exhibit 7) Especially now, after-sales service is increasingly important. The
percentage of after-sales service contribution to overall earning has been gradually
ascending.

(F) Organizational Development Strategy

Active self-reform and restructuring is another major factor for Audi has used to
sharpen its competitive edges.

Although the Audi 100 and Audi 200 models have had great success in China, the
marketing experience of the international market makes Audi believe that such a
success was characteristic of the initial stage of the Chinese auto market
development. Along with the maturity of the market, the successive access of rivals
calls for Audi to adjust, elevate and reform ahead of the market to maintain its
competitive edge.

Over the decade, apart from reform of marketing system, the other management
departments of the company were also optimized and adjusted successively. In 2003,
“Personnel Management Department” was renamed as “Human Resource
Department”; in the same year, the No. 2 Sedan Factory was formally established; in
2006, the Audi Sales Division and Product Management Departments were
established; in 2007, Purchase Department, Finance Department, Management
Service Department and Production Management Department etc. were also
continuously improved in organizational structure and managerial functions and posts
added as required.

The organizational structure of FAW-Volkswagen Audi was also optimized and

reformed along with its growth and ever-changing. From the one-page organization
chart when the company was established to the 8-page complete organizational
diagram presently, FAW-Volkswagen Audi has grown up into a vigorous young
company.

(G) Promoting the Elevation of Audi’s Dynamic Capacity With “Localization of

Whole Value Chain” as the Core

All the above key elements make up a complete, organic and powerful industrial chain,
which is integrated with the Chinese local market. In connection with the external
environment of the Chinese auto market, FAW-Volkswagen Audi has adopted a
strategy which while conforming to the Chinese market is more competitive in R&D,
product, procurement and marketing etc. Against the market change and response of
the rivals, it has gradually formed an integral and organic advantage with “localization
of whole value chain”. In the minds of domestic consumers, in terms of product level
and brand image etc., rivals like Mercedes Benz and BMW have some advantages,
but Audi enjoys a superior position in the whole industrial chain. Particularly, it is more
mature in localization of both product and marketing. It has defined the concept and
image of Chinese “luxury car” in an overall manner.

Due to FAW-Volkswagen Audi’s core concept of always adhering to and constantly

pursuing “localization of whole value chain”, FAW-Volkswagen Audi has been always
keeping one step ahead. Audi has had great sales in the Chinese market and obtained
the brand position it has not attained in the global market. Since Audi A6 was formally
launched in China, Audi spent 8 years to attain its sales in China of 101,000 units in
2007. It was the first high-level car brand with annual sales more than 100,000 units.
By 2011, Audi set a new record of 1.32 million in global sales. In that year, its sales in
China hit 313,000 units, up by 37.3% year on year.

As a partner of Audi, FAW also adopted the practice of internationally advanced

production, operation and sale into its own practices of introduction, absorption and
digestion. Under the “FAW-Volkswagen Audi model” with localization as the core,
FAW has cooperated with Audi over the past two decades and opened up a road of
exploration and success for the development of Chinese auto industry. The
“Localization of the whole value chain” has not only provided the support for FAW to
develop its proprietary brand, but also cultivated a number of parts enterprises at an
international level. It has not only made a contribution to today’s independent auto
industry, but also laid a foundation of Chinese auto industry to step into the age of
Industry 4.0.

III. New Challenges and New Opportunities

Before 2012, Audi was an auto brand “without worry in selling”, with its sales growing
at the rate of 100,000 units per annum. By the advantages of product, channel and
first-mover etc., it was a definer of luxury car brand on the Chinese market.

Today, however, the environment of the Chinese auto market has silently changed.
After 2012, Chinese economic growth slowed down and the domestic luxury car
market gradually transitioned from the previous high-speed growth to a stabilized
stage and perhaps an era of “slight growth”. The consumption environment is mature;
and the consumption of luxury cars has slowed. The market has suddenly reversed
from high demand to supply to the opposite. The luxury market began to focus on
product and service competition, with quality and differentiation issues becoming
mainstream. All the large enterprises began to pursue high quality.

Audi’s main rivals BMW and Mercedes Benz have engaged in hot pursuit with plant
expansion, price cutting and product imitation etc. in an effort to reduce the gap with
Audi. In the Chinese market they expanded production capacity and rapidly seized
market share through a “price war”, imitated Audi’s product and marketing localized
strategy etc.

Meanwhile, the structure of Chinese auto consumers changed. The young users born
in the 1980s and the 1990s have become a rising force of the auto market and become
a key driver for reshaping auto manufacture brand. The automobile has regressed
from “asset” to “consumer goods.” Design must fill more individual needs. Apart from
the products themselves, the pursuit of young consumer groups to “auto life” will
stimulate the development of automotive aftermarket and drive car producers to
transform from manufacturing enterprises to service-oriented enterprises.

While market competition intensifies, the auto industry also faces a rapid industrial
reform. The emergence of new energy vehicles, internet-based and digital-based
vehicles will be important. A new energy revolution is on the horizon. Tesla launched
its products in 2013, enabled by the new energy technological change. The internet
companies are creating smart car concepts. How can the pioneer FAW-Volkswagen
Audi face these challenge in the future?
Notes
1. The authors wish to thank Liu Zhanshu (former head of FAW-Volkswagen Audi
Strategy Division), Xu Yanli, Gaolingling, Gao Yuan and Gao Ge from FAW-
Volkswagen Audi Sales Division and Strategy Division for their contribution to the
case.

2. Tian Zhilong et al., Business Strategy of Vulnerable Latecomers in Chinese Auto

Market—Case Study Based on Vehicles Made by Geely, Chery, Brilliance, BYD,
Harfei and other Chinese auto manufacturers. Management World, 2013((8)): 139–
152.

3. Automotive Observer: The Legendary Leader of BMW China Retires after Winning
Merits. Netease Auto, December 10, 2012

4. Tan Xiaosong, Research on Marketing Strategy of Brilliance BMW Automobile

Ltd., Master’s Thesis of Jilin University, October 2014

5. Sun Yan, Research on Marketing Strategy of Mercedes Benz Cars in Chinese

Market, Master’s Thesis of Northeastern University, November 2012

6. Audi in China for 20 years

7. Before that, such a configuration is only found on Audi A6’s high-end model A6
2.8T rather than A6 1.8T.

8. Collated according to the information of FAW-Volkswagen Audi