For the first time the world's three major car markets -- the USA, Europe and Japan -- have declined simultaneously, said Volkswagen CEO Bernd Pischetsrieder.
But the VW group has an important offsetting factor -- China, where it is the market leader.
"Our growth in China was 70 percent last year and we expect growth of 90 percent this year," said Pischetsrieder, a keynote speaker at the Automotive News Europe Congress.
Volkswagen now controls 40 percent of the new-car market in China. But VW's CEO warned against too much China optimism.
He recalled what happened in Brazil, where several manufacturers invested in the 1990s, resulting in severe overcapacity after the market collapsed late in the decade.
"We will see what happens, but we do not want another Brazil case," Pischetsrieder said.
He said China has 102 car manufacturers today, including several global carmakers and many small local producers.
Growth in China will continue, but Pischetsrieder said exports from the country are not expected because China-built cars aren't competitive in export markets.
"Parts and components prices [in China] are too high for that," he said
Meanwhile, Pischetsrieder expressed concern about the situation in Europe.
"We are really faced by the best of both worlds," joked the VW CEO. He cited the European burdens of price harmonization, emissions legislation and the implementation of new car retailing rules.
"But on the other hand we also are confronted with US-style price discounting," Pischetsrieder said.
He said Volkswagen would continue to resist price-cutting in the USA.
"For VW it is essential to maintain our price tactics," he said.
Pischetsrieder said the number of car dealers in Europe would decline. He said the USA has 20,000 car dealers compared to 60,000 in Europe.
"And in the US they think they have too many," he said.
Pischetsrieder said carmakers in Europe "will end up with fewer contract partners, but with no fewer outlets."
"Therefore, we will end up with a second tier network of service dealers," he said. "It is to be seen if that results in lower prices for the customer or lower distribution costs for the OEM."
"But the launch sequence of various engine versions was wrong," he said. "The actual volume will come with the V8 later this year, when export to the USA starts."
Pischetsrieder also said that it would have been better if VW had launched its large Touareg sport-utility before the Phaeton.
"We would have done a better job if we had introduced the Touareg first," he said, "because that car could have prepared the market for Phaeton."