The situation in China could go in at least two directions. The first one is that the government may fine VW a modest sum and allow it to operate unfettered, probably with some control on sales of its diesel cars. This would save some of China’s own car companies from harm. VW has a partnership with SAIC Motor called Shanghai Volkswagen Automotive. SAIC owns 50% of the company. Another joint venture is FAW-Volkswagen Automotive, which was created by a deal with China’s FAW Group. FAW owns 60% of this.
On the other hand, China could take a very hard line. The central government has enough power to ban or sharply curtail VW sales. It could impose fines as large as any other VW faces from government entities. And it could hand larger parts of the VW joint ventures over to the Chinese partners.
China is the world’s largest car market, having moved ahead of the United States five years ago. Car sales in the People’s Republic have slowed, but the future growth of most global manufacturers rests in China, and to a lesser extent the United States. VW has the lead in market share in China, followed by General Motors Co. (NYSE: GM). If that lead evaporates, VW will have falling revenue worldwide, which means it will have less revenue fire power to offset the huge fines and civil actions it faces.
VW needs a “pass” from the Chinese government. If the country hands over VW’s business to local manufacturers, that will not happen.
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