Why VW won’t lose too much sleep over its China recall

October 12, 2015, 10:25 AM UTC
This picture taken on July 6, 2014 shows Chinese auto workers on the assembly line at the FAW-Volkswagen plant in Chengdu, southwest China's Sichuan province, during the visit of German Chancellor Angela Merkel. The plant, the second one in China, produced its first car in October 2011 and is now operating in full capacity with an expected production of 600,000 vehicles in 2014.. AFP PHOTO/GOH CHAI HIN (Photo credit should read GOH CHAI HIN/AFP/Getty Images)
Photograph by Goh Chai Hin — AFP/Getty Images

Volkswagen AG (VLKPY) is to recall thousands of diesel vehicles exported to China, after the country’s environmental protection ministry voiced “extreme concerns” about their emissions level, but the immediate impact on its massive business there is likely to be limited.

Although the development is a potentially major PR headache for the company, the number of vehicles affected–1,950 according to a company statement–is a tiny fraction of the 3 million it sold through local JVs last year. For now, the company is only recalling Tiguan models that were exported to China. It says that locally-made cars weren’t running the cheating software that allowed them to mask the true level of harmful emissions put out by their engines under normal driving conditions.

VW is anxious to keep its extensive operations in China insulated from the scandal over its past doctoring of emissions tests, due to its heavy reliance on China for sales and profits. Nearly one-third of its global production is at its joint ventures in China, where it vies with General Motors Co. (GM) for the status of the biggest foreign automaker. The investment community has long seen VW’s market position in the Middle Kingdom as one of its greatest strategic strengths.

VW is helped by the fact that China has had a more balanced approach to reducing emissions than Europe. Because China has been more focused on cutting overall levels of pollution rather than just carbon dioxide emissions, it has preferred to promote electric vehicles as an environmentally friendly alternative to gasoline. As a result, diesel cars occupy an even smaller niche in China than they do in the U.S.. According to Bloomberg, they accounted for only 0.4% of total deliveries in the 12 months through August. By contrast, every second car sold in Europe last year was a diesel. .

Another reason why VW might not lose too much sleep over the news is that the Chinese government recently announced a big cut in the sales tax on small autos. That will benefit VW disproportionately as it makes five of the 10 best-selling models in that category in Chins, according to Reuters.