Volkswagen steps up southern China push with Guangdong expansion

FOSHAN, China (REUTERS) - Volkswagen AG is expected to announce plans to significantly boost the capacity of a key plant in southern China as Europe's No.1 carmaker ramps up efforts to grab more market share in a region dominated by Japanese rivals.

On Wednesday, Volkswagen will officially open a plant in Foshan city in southern Guangdong province which it operates under a venture with state-owned automotive enterprise FAW Group Corp. The plant, capable of producing 300,000 vehicles a year, recently started to manufacture the redesigned Volkswagen Golf car.

Volkswagen, which also sells the Audi, Skoda, Lamborghini and Bentley brands in China, is expected to unveil on Wednesday details of a plan to double the capacity of the Foshan plant, sources familiar with the matter told Reuters. The plant is also slated to start producing the Audi A3 hatchback in early 2014, the sources said.

The planned expansion stems from an agreement signed in May by the two companies, which aim to boost the plant's capacity to 600,000 vehicles a year with an investment of 15.3 billion yuan (S$2.05 billion).

Officials at Volkwagen and FAW were not immediately available to comment.

Volkswagen has deepened its presence in the region since launching an initiative dubbed the "South China Strategy" in 2009, through which the carmaker has also increased the number of retail stores in the area. Its efforts have focused on Guangdong, a large auto-buying province where the influence of Japanese carmakers is the strongest in China.

In a sign that Volkswagen's efforts are paying off, the market share of the Volkswagen brand, excluding the Audi, Skoda, Lamborghini and Bentley brands that the company also markets, climbed to 13.6 per cent in southern China in the first half of this year from 11.9 per cent a year earlier, according to consulting firm LMC Automotive.

By contrast, Japanese brands - including Toyota Motor Corp , Honda Motor Co Ltd and Nissan Motor Co Ltd - have seen their combined market share shrink to 23.9 per cent from 29.8 per cent during the same period.

The expansion in southern China is part of Volkswagen's plan to boost the group's annual manufacturing capacity in the country to 4 million vehicles by 2018.

Volkswagen increased its China sales by 18.5 per cent last year to 2.6 million vehicles.

The move spells bad news for Japanese automakers which have lost some of their hold over the southern China market after a spike in anti-Japanese sentiment since last year.

While the territorial dispute between China and Japan has helped fan anti-Japanese sentiment in China and depress sales of Japanese-branded cars, "Volkswagen has been successfully nibbling market share away from the Japanese brands" over the past few years, said Mr John Zeng, a Shanghai-based senior analyst at LMC Automotive.

"By adding production capacity in the region, Volkswagen may also further change the competitive landscape (in South China) over the next three to five years," he said.

The German automaker defines South China as a region that includes the provinces of Guangdong, Guangxi, Jiangxi, Zhejiang, Fujian and Hunan. The region has big metropolitan cities like Guangzhou and Shenzhen.

"Volkswagen Group's strategy is to target every region and every segment in China," said senior analyst Namrita Chow at IHS Automotive in Shanghai.

"By segregating the large China market into different geographical regions, Volkswagen can push its penetration to every nook and cranny of the country."

For now, in southern China, the focus is still on Guangdong, where consumers bought a total of 1.16 million passenger vehicles in 2012 and where Volkwagen's Japanese rivals have the strongest presence.

According to industry consultant R.L. Polk & Company, Japanese brands as a whole had roughly a 40 per cent share of the auto market in Guangdong, China's third-biggest auto-buying province by sales volume, in 2012.

Volkswagen Group brands, including Volkswagen, Audi and Skoda, had a 12.8 per cent share of Guangdong's auto market.

By building a plant in Foshan, near the Guangdong provincial capital of Guangzhou, and now doubling its capacity, Volkswagen is seeking to tighten its control of Guangdong's auto market.

In addition to Guangdong, Volkswagen earlier this year broke ground for a second southern China plant, which is being constructed in the Hunan provincial capital of Changsha.

The plant in Changsha, to be operated jointly with Volkswagen's China partner SAIC Motor Corp, is scheduled for completion by the end of 2015 and is expected to be able to produce 300,000 vehicles a year.

Volkswagen Group has assembly plants in Changchun, in Chengdu with FAW, as well as in Shanghai, Yizheng, Nanjing and Urumqi with SAIC.

Volkswagen, which lacks production facilities in the member-nations of the Association of Southeast Asian Nations (Asean), will at the end of this week unveil steps to set up distribution channels in the Philippines, a source familiar with the company's plans told Reuters.

Mr Soh Weiming, head of Asean sales for the Volkswagen brand, will hold a press conference in Manila either on Friday or Saturday to detail the plans, the source said, declining to be more specific.

Volkswagen "will become an active player" in Asean in coming years, group production chief Michael Macht told Reuters in an interview at the Frankfurt auto show.

The manufacturer launched a task force last year to scan the region for potential production venues and is currently "very actively on the road"there, Mr Macht said, without being more specific.

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