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Rigging Scandal Puts VW Dealerships in Korea at Greatest-ever Risk
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Rigging Scandal Puts VW Dealerships in Korea at Greatest-ever Risk
  • By Michael Herh
  • October 26, 2015, 06:30
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The Volkswagen logo on a TDI diesel engine of one of its cars.
The Volkswagen logo on a TDI diesel engine of one of its cars.

 

The Volkswagen scandal drove down Volkswagen car sales and weakened its brand power in Korea. It is now threatening the survival of Volkswagen dealerships by blocking cash flow into them. Volkswagen Korea is responding with the desperate measure of returning all Euro 5 model inventories, but its efforts are not enough to stop the deteriorating situations.

According to the import car industry, it is said that Classe Auto, the biggest dealer of Volkswagen in Korea, is considering giving up its business rights in dealing with Volkswagen vehicles. Classe Auto began its Volkswagen dealership business in 2008, and is now running seven exhibition centers, five service centers, and one used car showroom across the nation.

The company is the biggest dealership of Volkswagen now that it has been recording the most sales of Volkswagen vehicles in Korea. Last year, its sales hit 240 billion won (US$212 million), with a sharp rise in the sales of Volkswagen Korea. “They say that Classe Auto, a long-time partner of Volkswagen, has suffered a big drop in sales to the extent that lately Classe Auto failed to pay salaries to its employees,” an industrial sauce said.

Unlike dealerships of big companies, Classe Auto has a weak cash flow, so it does not have countermeasures against short-term shocks. This makes them consider giving up their business rights. Volkswagen cars are priced low or middle, although they are import cars. This characteristic leads many dealerships to hold down their profit margins and sell as many as possible. Under these circumstances, the scandal slashed sales of Volkswagen cars, impeding the operation of exhibition centers a great deal.

Classe Auto is not the only one that suffers from the scandal. It was reported that GS Mbiz which became a Volkswagen dealer in 2013 recently discussed the relinquishment of its dealer rights on a high level.

The GS Group recently expanded its business scope into the dealer business, and even import car repair and parts for import cars, despite some criticisms that the move robs small businesses of their work. But this scandal put a quick brake to GS’s business plan. It is said that these market changes thwarted the Hyosung Group’s plan to become the biggest mega dealer in Asia by taking over an Audi dealer right after Mercedes-Benz, Lexus, Ferrari, and Maserati.

The Hyosung Group has decided to give up taking over equities in Charmzone Motors and its building in Seoul’s Daechi-dong from the Charmzone Group. The acquisition of the equities and the building can naturally bring Hyosung the Audi Daechi Audi Center, which is Asia’s biggest, as well as dealerships in Daechi and Gangdong.

Charmzone Motors, an official Audi dealer in Korea, is now suffering from severe financial difficulties. The company is unable to give back contract money to customers who canceled contracts to purchase Audi cars. Charmzone Motors has not announced any solutions, repeating the position that they will quickly address the problem. Import car experts predict that it is highly likely that more Volkswagen deader companies will sell off their sales rights due to the plunging sales of Volkswagen cars.

This is because most import car dealers borrow a lot from banks, and if the banks begin to pressure the dealers to pay back the money, they will not be able to avoid financial difficulties. “We do not have any proper solutions, since we cannot recover consumer trust, not to mention switching to aggressive sales promotion, until the Ministry of Environment’s announcement of the final results of its investigations,” said a representative at a Volkswagen dealership. “Neither shipments nor contracts are done at some dealerships rumored to sell off their dealer rights. So it will be not easy for them to cut off vicious circles.”