BEIJING - Volkswagen AG used to be the only kid on the China block. With a market share of 60 percent in recent years, the German automaker could be forgiven for thinking China was its private back yard.
But in the past couple of years, VW's international competitors have aimed their big guns at China and begun production here, despite a market that still totals less than 600,000 units annually.
General Motors has invested $1.6 billion in a manufacturing joint venture in the populous coastal city of Shanghai. Honda took over a Peugeot venture in the southern city of Guangzhou and began producing Accords in October.
In addition, Citroen has turned around its faltering facility in the central city of Wuhan and Ford is trying to get a license to manufacture passenger cars.
'In this climate, VW certainly cannot hold market share. These levels are unsustainable and could only exist in a closed market,' says Ashvin Chotai, head of Asian Automotive Research at DRI/McGraw-Hill in London.
After years of thriving on the sale of outmoded Santana models, VW is now faced with serious international competitors manufacturing inside China's 80 percent tariff wall.
'In 1985, the Santana was a new car. The problem is that it has not improved much since then,' Zhang Suixin, chief representative of VW China, acknowledged.
But VW is fighting back with a flurry of new vehicles that will give it a presence in each main segment of China's increasingly sophisticated auto market.
Its plant in Changchun, in northeast China, rolled out its first Audi A6 in early September. Next March, an extended-wheelbase Passat will go into production at the sprawling VW facility on the outskirts of Shanghai. Then, in 2001, the new Bora goes into production in Changchun. The following year a family car, the last vehicle in VWs public battle plan, is set for Shanghai.
Targeted annual sales of the newest model, the Audi A6, are 30,000 in the medium term, half of what the company estimates to be the size of the high end car segment in China. Although he would not specify a price, Roland Gumpert, executive director of sales and marketing for Audi China, indicated the vehicle would retail for more than 300,000 Yuan.
But the challenge lies in more than introducing new vehicles.
'We need to push our competitive ability to an international level within five years,' says Zhang. 'And that includes achieving economies of scale in both the Shanghai and Changchun plants, technology, sales and marketing services.'
While the competition will be much tougher than before, several factors are working for VW. For one thing, the government is less likely to crudely intervene in the auto sector than in the past.
'The government was concerned a couple of years ago that VW was getting too powerful. Now they are more inclined to leave things to market forces,' says Chotai.
'VW will continue to be the leading player in China, and we still expect them to grow in production terms.'
The company also has painstakingly built up a supplier network to give it around 90 percent local content for the Shanghai-produced Santana.
'Until two or three years ago localization was still a struggle,' says Zhang.
But that supplier base gives VW greater flexibility to bring in new products, although new vehicles also will demand higher levels of foreign technology. Of the 200 suppliers to the VW-FAW factory in Changchun, 60 are foreign joint ventures and half the components are sourced within the province.
Product development also will be boosted by the opening of the $120 million research and development center in Shanghai, which was officially opened in early November by German Chancellor Gerhard Schroeder on an official visit to China.
But perhaps the greatest lead that VW has over its competitors in China is the wide spread of dealerships and service stations that sell its cars. Although most of the 760 are not up to the standard of the modern dealerships now being set up by GM and Honda, they extend to more than 250 cities, according to VW.
VW forecasts sales this year of between 235,000 and 250,000 Santanas and 80,000 Jettas. In a total projected market of about 550,000 cars, that - again - would yield a market share of 60 percent.
But VW knows that is no reason for complacency.
'We have something to defend, of course, and we have to initiate some changes to be ready for the new environment,' Robert Buech-elhofer, VW AG board member for worldwide sales and marketing, said in an interview here.
'But Volkswagen to date has invested $1.6 billion in China, and we are going to invest another $1.6 billion over the next five years. At all levels, we are preparing for a very positive future.'