Volkswagen Plans an All-Out Invasion of China's Auto Market

GM might have pushed Volkswagen to the second place regarding sales in China in the first quarter, but the German giant is ready to fight back.

May 5, 2014 at 8:47PM

Volkswagen (NASDAQOTH:VLKAY) is in a nail-biting contest with General Motors (NYSE:GM) over supremacy in the world's largest auto market -- China. The European automaker defeated the American auto major in 2013, but the latter has reclaimed the top position in the first quarter of 2014. Undeterred, Volkswagen has announced that it will outperform the China auto industry as a whole in 2014. Let's find out what the company is up to.

Volkswagen Golf GTE at Auto China 2014 Group Night in Beijing. Source: Volkswagen

The target and roadmap
CEO Martin Winterkorn said, "China is the biggest single market of the Volkswagen group and plays a decisive role in our strategy plan." And the company's plan is to become the world's top car seller by 2018. 

Volkswagen is looking at a minimum 10% sales growth in China in 2014, bettering the 8%-10% increase expected in the industry. The company aims to deliver an unprecedented 3.5 million vehicles through the year -- more than the size of India's entire passenger-vehicle market. Volkswagen hinted that it will stay ahead of GM, which is targeting a sales growth in line with the industry's.

In 2013, Volkswagen had sold 3.27 million units, 16% more than the previous year, while GM's sales increased 11%, to 3.16 million. In the first quarter, the sales tally stood at 919,114 and 880,700 for GM and Volkswagen, respectively. 

Volkswagen is in overdrive -- it has a capital budget of 18.2 billion euros, or roughly $25 billion, for China for the years 2014-2018. The money will go into new technologies, plants, and a complete product offensive. Volkswagen plans to introduce as many as 100 new models globally by the end of next year, and most of them will be offered in China. It intends to increase the number of dealerships by 50% to more than 3,600 by 2018. 

It wants to penetrate deeper in the tier-3 and tier-4 cities of western China. Volkswagen estimates that in tier-3 cities, only 30 in every 1,000 people own a car, and in tier-4, just 18 in 1,000 do.

The company is looking to be the frontrunner in China's electric-vehicle program with its line of electric and hybrid models. It will roll out the electric up! and e-Golf models later in the year, and the Audi A3 e-tron and Golf GTE next year. Releases are lined up for 2016, as well.

Despite a slowdown, the Chinese automotive market will remain in a mode of expansion. In a Bloomberg report, Finbarr O'Neill, president of J.D. Power & Associates, said, "As a whole, the growth throughout China in the tier-3 and 4 cities, in the west, and the aspiring middle class, assures continued growth for the automotive industry." Automakers are going to do all they can to grab a bigger portion of the pie.

GM plans to spend around $12 billion through 2017 on product launches and setting up of five new manufacturing facilities by 2015, which would expand its production capacity to around 5 million by the end of 2015. 

GM may launch at least 60 new or upgraded models by 2018, focusing on the passenger and luxury car segments, which are Volkswagen's forte in China. GM showcased models like the Chevrolet Trax, Cadillac CTS luxury sedan, and the best-selling next-gen Chevrolet Cruze at the Beijing 2014 Auto show. Ford and Toyota are also stepping on the gas, and planning to come out with new models.

Volkswagen has two big strengths that will reinforce its game plan -- solid liquidity position and advanced technology.

Liquidity: The company has been generating solid cash flows, with cash from operations increasing to 20.6 billion euros (approximately $28.56 billion at current rates) in 2013 from 13.7 billion euros in 2007. It ended 2013 with a solid automotive liquidity of 16.9 billion euros (approximately $23.43 billion). No wonder then Volkswagen has decided to fund the entire China investment from its own coffers.

Source: Volkswagen

Technology: Volkswagen's MQB, or modular transversal tool kit, could soon become reality in most of its cars sold in China. It has already delivered around 1 million MQB vehicles globally in 2013, and plans to take the number up to 4 million by 2016. The concept behind the cutting-edge technology is beautifully simple -- using the same structural architecture and infotainment systems across models.

With the help of MQB, Volkswagen would be able to quickly customize models to suit customer tastes, and save billions on production costs. Within a few years' time, it would be making most of its VW, Skoda, and Seat brand vehicles on this platform. MQB could also play a big role in the company's electric-car ambitions in China, because through it, Volkswagen can electrify most cars in its portfolio.

The technology would be implemented in 20 plants by early 2017, including some Chinese plants. Volkswagen has an MQB plant at a remote location in Ningbo, Zhejiang, away from the prying eyes of competitors.

Last word
Volkswagen sees a huge opportunity in China, and wants to capitalize on it by spending heavily on new factories, dealership expansions, and model launches. The company is penetrating deeper to serve even the more remote areas of the country. Volkswagen's financial and technological strengths are going to amply accommodate its China offensive, and help it get closer to being the world's top automaker.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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