SHANGHAI - In China, Volkswagen AG is king of the carmakers. It already has 60 percent of the only major East Asian market where sales still are rising. Moreover, its share continues to rise.
In the first eight months of 1998, VW group sales in China were up 5.1 percent to 200,912, compared with a 4.1 percent increase in passenger car sales industrywide.
Part of VW's strength results from its having followed the developing market maxim: Get in early when the cake is being cut, and grab yourself a big slice. It set up the second foreign automaking joint venture in China, following Chrysler Corp.'s Beijing Jeep Corp., in 1984 and has built by far the closest thing to a nationwide distribution and service network.
But VW has another strength: the broadest lineup of any carmaker in China. It makes two models at its Shanghai VW plant: the base Santana and the newer, more well-appointed Santana 2000. In addition, another joint venture in Changchun, in Northeast China, builds the Jetta and the Audi 200. It will introduce the Audi A6 in the second half of next year.
But there is trouble ahead. Michael Dunne, president of consultancy Automotive Resources Asia Ltd., based in Bangkok, said: 'VW is doing incredibly well now, but nobody can hold this share. There is also growing competition from the small-car sector.'
Other makers are launching models to compete with VW's upmarket sedans while the fastest-growing segment in China is for cars both smaller and cheaper than the Santana. The big debate is whether the industry will grow on the basis of a 50,000- to 60,000-yuan (about $6,000 to $7,300) Suzuki or on the basis of a 200,000-yuan (about $24,400) sedan.
According to Vaughn Koshkarian, outgoing president of Ford Motor Co. (China), who will become Ford Motor Co.'s vice president of public affairs Jan. 1: 'In a country the size of China, the reality is you can do both.'
How VW handles the increased competition and its ability to enter the crucial market for less expensive 'people's cars' will determine its future success in this giant market.
Santanas in Shanghai
The mainstay of the VW enterprise is the 50-50 joint venture with Shanghai Automotive Industrial Corp. to manufacture Santanas in Shanghai, China's sprawling metropolis at the mouth of the Yangtze River.
The plant, spread over a number of blockhouse-style buildings in an industrial park in the west of the city, went into production in 1985 and has dominated the passenger-car market since.
Inside the assembly plant, workers clad in blue overalls deftly add parts as Santana bodies are mated to powertrain components. Over-head, a digital andon display records the daily output of vehicles.
The plant does not have the high-tech feel of the almost-completed Shanghai General Motors factory across the river in Shanghai's Pudong district. But new, sleek body lines and upgrades, including new blue and green metallic colors, can do a lot to spruce up a model that in the past seemed to have modified the Henry Ford dictum a bit to rule that a car can be any color as long as it is maroon.
Last year, sales came to just over 230,000. In contrast, Beijing Jeep, the Chrysler joint venture started in the Chinese capital in 1983, has been far less successful. Beijing Jeep sales last year were under 20,000. Production this year will not reach the 10,000 mark, according to an Automotive Resources Asia estimate.
In a country where most carmakers survive on one model, Shanghai VW's two versions have allowed the company to go after two distinct price segments of the market. The base carbureted Santana, the original car launched by Shanghai VW in 1985, starts at $13,600, while the fuel-injected Santana Gsi is priced at $22,300.
In Changchun, a modern factory has provided a base for a major market turnaround. Jetta sales should climb to 60,000 this year from 44,000 in 1997, according to VW China Chief Representative Zhang Suixin.
'Initially, we couldn't get the proper sales volume, but we made a small profit last year, and in the next two to three years, Jetta sales will reach 100,000,' Zhang said. 'There is a clear improvement in sales and marketing in Changchun.'
Officially, VW is limited in its ability to market its products in China. That's the province of its Chinese partners. But in Chang-chun, VW consulted extensively with Chinese partner First Auto Works. Some of the steps were basic. Drawing up maps of sales territories, for instance, showed that almost all sales were concentrated in just three cities. Looking to other markets helped boost sales.
Changchun is not a total success. Production of the Audi 80, the early mainstay of VW production in Changchun, has ground to a halt, undermined by the Little Red Flag - a cheaper copy of the Audi 80 with a Chrysler engine - put out by First Auto Works.
Crowding the market
This year, Audi came out with an Audi 200, an expensive, upgraded version of the older model, in two trim levels. Priced at $42,680 and $54,780, the two versions amount to more contenders at the already top-heavy upper end of the market.
The market is getting even more crowded. Next year, Shanghai GM expects to build just under 20,000 Buick sedans. The Audi A6 will roll out of the VW plant in Changchun later in the year. Both will threaten the Santana 2000.
In October 1999, Honda will begin building an Accord in the former Peugeot factory in Guangzhou, in the south of China. Shanghai VW will counter by adding a Passat to its production range in 1999.
Current capacity in the auto sector is double demand, according to Dunne of Automotive Resources Asia, so these additions can only further tighten competition.
A deeper challenge for VW is the growing demand for small cars in China. The traditional market - high-end autos, bought by state-owned enterprises, arms of the government or foreign joint-venture companies - is stagnating. Growth now lies in cheap cars aimed at private buyers or those with small rural enterprises.
High growth is taking place now among tiny light vans with passenger capacity and small passenger cars such as the Suzuki Alto. The latter, the fastest-growing seller in China this year according to Automotive Resources Asia, is manufactured in Chongqing in southwestern Sichuan province. Japanese technology dominates the cheap end of the market, as the bulk of these light vans are produced under license from Mitsubishi, Suzuki and Daihatsu.
VW even faces a challenge from China's native makers, which sold 2.8 million cheap agricultural vehicles in 1997. Because the government wants to mechanize China's rural sector, such vehicles face very few safety regulations, although they are being limited in horsepower and banned from major highways. Some 2.2 million of last year's models were three-wheel trucks.
Jack Perkowski, chairman of Asimco, an investment company involved in auto parts ventures, believes that as rural incomes rise, these Chinese vehicle makers and the dominant makers of China's 10 million motorcycles last year will shift to conventional passenger vehicles.
He added: 'Their customer base is in the countryside, and they will gradually upgrade their vehicles.' By this reckoning, foreign makers do not appear ready to meet the challenge of a mass market developing from the bottom up.
To avoid an erosion of market share, VW recognizes it needs a model to compete in the lower-end segment, something below the psychological price point of 100,000 yuan, or about $12,140. 'We need something below the Santana,' said VW's Zhang.
Getting central government permission to introduce another vehicle may not be easy. So, for now, VW will continue with its existing models and plans. But Zhang knows what VW and China need in their future cars. 'They should be small, eco-friendly and safe,' he said. They also will have to be cheap.