BEIJING -- Upstart General Motors has thrown down the gauntlet by going public with plans to displace Volkswagen AG as the leader in China.
"We believe GM can ultimately claim the largest share of this growing market," said Phil Murtaugh, CEO of General Motors China Group.
"Now it's war," said Michael Dunne, president of Beijing- and Bangkok-based market research firm Automotive Resources Asia Ltd.
The stakes for both companies are huge, given China's explosive growth.
VW sold more cars here last year than in Germany. "We also made more money" in China than in Germany, said Barthel Schroeder, VW executive vice president and member of the board of management, technical. "By 2008, we expect China will be the most important market for the total VW Group."
Last year, China was GM's fourth largest market. "It probably will pass Canada and the U.K. to become the second largest this year," Murtaugh said. GM's China profits tripled in 2003 to $437 million, or 40 percent of GM's global automotive profits.
It won't be easy for GM to overtake VW. VW, the first foreign automaker to build passenger cars in China, has dominated the market here for two decades. But new entrants have whittled away at its lead.
VW says it aims to retain 30 percent of the market. VW's passenger-car market share has dropped to 29 percent this year, though, from 59 percent in 1998, according to Automotive Resources Asia.
GM's market share is about 13 percent, up from less than 1 percent in 1998. The next-largest foreign carmaker in China is Honda Motor Co., with between 4 percent and 5 percent.
But GM's recent gains don't guarantee victory. In the next five years, GM, Toyota Motor Corp., and Hyundai Motor Co. will be the fastest-growing foreign carmakers in China, according to Global Insight analyst Ashvin Chotai. But at the end of those five years, VW will still be China's biggest carmaker, he said.
GM's latest salvo against VW involves a further rapid expansion of capacity in several market segments. GM's vehicle capacity at its various joint ventures will jump from 530,000 now to 1.3 million in 2007. In November, GM had said it would raise capacity to 865,000, but it is adding more.
"I firmly believe that our policy of moving aggressively has been a prime reason for our success," Murtaugh said.
GM will launch 20 new and upgraded products in the next three years, led by the introduction of the Cadillac brand.
GM and its partners jointly will invest more than $3 billion from their China market profits in the expansion. GM's investment will be slightly less than half of that, reflecting the size of its ownership stakes.
Capacity at its flagship Shanghai GM operation will more than double from 200,000 to 450,000. The expanded facilities will begin operations in 2005. Capacity at SAIC-GM-Wuling Automobile Co., a subcompact car and truck maker, will rise from 200,000 to 336,000. Output will start in 2006. GM is scouting other possible plant locations.
GM will expand an existing engine plant at Shanghai GM, and add a 300,000-unit four-cylinder engine plant for Wuling. It also will build a transmission plant, resume output of new models at a plant that used to build Chevrolet Blazers, expand its technical center in Shanghai, and launch an automotive financing company.
VW, though, is not standing still. It plans to double its capacity to 1.6 million by 2008 by expanding capacity in both Shanghai and Changchun, China. It also will build new engine plants in Shanghai and Dalian, China, and expand an existing one there.
"We are not watching what GM is doing," said Bernd Leissner, chairman of Volkswagen Group China.
Leissner and other VW executives hint that GM is buying market share through its recent price reductions. Murtaugh counters that it is not cutting prices to gain share, but to reflect manufacturing costs that are coming down dramatically.
But Volkswagen China's strategy to hold on to its lead involves more than just adding capacity. The German company aims to do no less than change its entire corporate culture. Decision-making power for everything from engineering to new models to parts purchasing is shifting from Wolfsburg, Germany, to Beijing as the company tries to think less like Germans and more like Chinese.
"You have to work where your main customer is located," Leissner said.
To bring new models to market in China more quickly, Volkswagen will make product launch decisions jointly in Wolfsburg and Beijing instead of delaying an introduction into China for up to two years while seeking local parts sources.
Executives with years of experience working overseas are taking key positions in the newly created Volkswagen China management structure.
Volkswagen also hopes to cut supply costs by jointly sourcing more parts for its joint ventures, a tough task given that the two partners are fierce competitors with captive supplier groups.
Volkswagen also aims to bolster the Volkswagen brand in China, where most consumers know VW only by its models. "Santana is a brand today," Leissner said. "We have to build up the brand name Volkswagen in China. You can't survive if you have only models as a brand."
In a major marketing coup, Audi on Thursday won a heated bidding contest to be the global automotive partner of the 2008 Beijing Olympics.
But it may be too late for Volkswagen to beat back the GM juggernaut. GM's sales grew by 137 percent in the first quarter of 2004. Meanwhile, VW's sales rose by an anemic 5 percent compared to the same quarter in 2003. The total market grew by almost 45 percent.