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Business

VW Places Big Bet on China

German automaker Volkswagen plans a massive investment push in China that will nearly double its production there. But some worry that the country's once-insatiable auto market may soon be facing a glut.

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Signs of the times: VW announces expansion plans

VW Chairman Bernd Pischetsrieder said his company plans to invest around €6 billion ($6.7 billion) in China over the next five years, including building a new factory with its First Automation Works joint-venture partner, and making improvements to two already exisiting facilities.

As a result, output will be raised to about 1.6 million vehicles a year from a current 80,000 by 2008. VW is making the move in the hopes of holding on to its market-leading position in China.

Falling market share

First-half year-on-year sales leapt 52 percent, but the company's market share dropped to 34 percent from 40 percent. The drop reflects the overall rapid growth of the Chinese car market and the increasing threat of competition from local competitors.

"The market is outpacing our (production) increase," Michael Wilkes, Volkswagen's China spokesman, said.

Yet some analysts have warned that capacity may be outpacing demand, threatening a glut and possible price war that could hit margins hard.

China's State Statistical bureau warned last month that some 10,000 cars ended up sitting in warehouses in April and May -- despite sales jumping due to the outbreak of the deadly SARS virus, which scared people away from public transportation.

Rivals afoot

The expansion will be financed from the Chinese joint ventures themselves.

VW, which is battling falling sales in its European markets, has invested €3 billion euros in China so far and is by far the largest auto maker in the country. But others are planning similar expansion projects, including rivals General Motors and Nissan Motor Corp.

Volkswagen-Vorstandschef Bernd Pischetsrieder, links nimmt an der Grundsteinlegung des 2. VW- Werk in China teil Volkswagen Changchun

Volkswagen CEO Bernd Pischetsrieder, left, helps place the corner stone for a new factory in Changchun on July 15, 2003.

The Wolfsburg-based car manufacturer has already begun construction on a €1 billion factory at its FAW-Volkswagen facilities in the northeast city of Changchun (photo), and will increase production capacity at an existing factory there. At the same time, Volkswagen's venture in China's commercial hub, Shanghai Volkswagen Automotive, will raise output by 75 percent.

Each of the new factories will bring a model to the market once a year, beginning next year with a small city delivery van. On Tuesday, VW production lines in China began churning out Golfs.

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