The great Volkswagen sell-out

The story behind the stock clearance, and should you buy a Volkswagen?

(Screen grab from Volkswagen Malaysia’s website)

While the Volkswagen brand in Malaysia has largely avoided the Dieselgate fall-out, its decade-old existence in Malaysia is hardly what one would term as smooth-sailing. In the 10 years since Volkswagen Group Malaysian (VGM) began operations, it has seen sales hit a peak of 13,000 units (in 2012) to less than half of that last year, it has had to cope with the ignominy of disgruntled owners picketing on its headquarters’ lobby, undertake the infamous DSG transmission recall, as well as six changes of managing directors.

In contrast, the soon-to-depart Honda Malaysia CEO is saying goodbye after a fruitful five-year stint, while the last CEO of Mercedes-Benz Malaysia served a four-year term. Granted that changes in leadership isn’t uncommon in car companies, one has to wonder whether the challenges facing VGM have largely been self-inflicted.

Not a stock clearance of sneakers, but cars

Take for example its latest sales campaign – The Volkswagen ‘Drop Everything’ Sales. It’s a delightful thing to be passing savings to customers, but the quantum offered is shocking – 33% off a Passat, 34% off a Jetta, and a not insubstantial 22% off a Polo. Imagine a D-segment German saloon for the price of a Honda Civic, or the Jetta C-sedan at Toyota Vios prices. It’s no surprise that some competitors have described Volkswagen’s move as ‘unprecedented’, even ‘desperate’.

For the price of a Civic, you can now get into a D-segment German saloon.

It also goes without saying that the already depressed residue values of Volkswagen cars will now be further depressed, but the worrying long term prospect is customers becoming resistant to ever paying actual (or near) retail price once they have tasted the fruits of these unheard of prices. By choosing the path of unparalleled discounts, all roads lead to a slippery slope for Volkswagen. What happened to rebuilding image and regaining hearts and trust?

The slippery slope of discounting

VGM’s stock clearance comes at a time when the industry is already under heavy margin pressures (our educated guess is CKD models generally enjoy anywhere from 5% to slightly over 10% distributor margin, depending on localisation levels, and excluding duty-exempted hybrid models), and even allowing for healthier-than-normal margins for Volkswagen CKD models, we believe VGM would still end up heavily subsidising each and every Passat, Jetta and Polo sold.

Yes, other brands offer discounts in the form of pre-registration and demo units, typically with some mileage on the latter, but unlike VGM, the efforts are primarily driven by independent dealers who recoup their own margins by ordering more cars and earning higher volume-based incentives.

(Screen grab of Volkswagen Facebook advertisement)
Asleep at the wheel?

The question that begs to be asked: why is VGM doing this? Since it made clear that only 2014 and 2015 manufactured models are up for sale, a simple deduction would be the presence of a sizable and aging stock. Looking at the numbers released by the Malaysian Automotive Association, Volkswagen assembled over 9,300 units of Polo (sedan and hatchback), Jetta and Passat in 2014, and over 4,200 units of the same models in 2015.

Based on buying trends (since there’s no longer model breakdowns from MAA), our estimation is that these locally assembled Volkswagens (majority of them sedans) constitute around 70% of all Volkswagens sold (8,916 units in 2014, 6,405 units in 2015, for a total of 15,321 units), equivalent to around 10,500 units of CKD sales in the last two years, which means that VGM has close to 3,000 units of CKD cars to clear. In other words, that’s seven months’ worth of Polo, Jetta and Passat stock based on the average monthly uptake of 2015, though the consumption rate will no doubt be higher at these super-low prices (maybe three to four months to clear?), but whichever the case, the elephant in the room is why didn’t VGM better manage the supply so as not to end up with such high inventories (and the corresponding cost of storage) in the first place?

Is there light at the end of the tunnel?

Short of being a fly on the wall of a VGM sales/production meeting, we won’t know the exact reason how this situation came to bear. Suffice to say, Volkswagen’s overriding global ambition to chase volumes and become the number one automaker probably has something to do with it. Now that Dieselgate has ‘rearranged’ priorities at Wolfsburg, perhaps VGM can start afresh too after this clear-out and to finally begin delivering the brand promise loyal owners justly and duly deserve.

And if you’ve been eyeing a Volkswagen all your life, we cannot deny that it’s a great time to score a brand new, unregistered VW vehicle at an unbelievable price. Just make sure the tyres and batteries are in working order, and enter the deal with your eyes wide open.