Volkswagen wants larger stake in FAW VW
By Ren Kan (China Daily)
Updated: 2004-03-18 13:52

German-basedVolkswagenAG is seeking to expand its stake inFAW VW, its joint venture with First Automotive Works Corp (FAW) in Changchun, in Northeast China's Jilin Province.

Folker Weissgerber, a Volkswagen board member, said he hoped the new stake structure would be 50-50, the limit set by the State for Sino-foreign automobile joint ventures.

Almost all automobile joint ventures in China have followed the rule except Japan's Honda which holds a 65 per cent stake in its joint venture based in an export processing zone in Guangdong Province where it produces small cars for export.

At present, Volkswagen group holds a 40 per cent stake in FAW VW including 10 per cent for its wholly-owned subsidiary Audi. FAW VW was established in 1991 with a total investment of 11.13 billion yuan (US$1.34 billion).

FAW VW's sales of Jettas, Boras, Golfs, Audi A6 and A4s surged by 55 per cent year-on-year to 298,000 cars last year, The strong sales,which made up 14.2 per cent of China's total car sales last year, keep FAW VW the second-largest Sino-foreign car maker in China after Volkswagen's other joint venture in Shanghai

At this time, the company's German and Chinese partners are engaged in the valuation of the stake, and analysts believe it still takes time to reach a final deal.

"We are seeking a solution benefiting all three sides," said Erich Schmitt, vice-president and board member of Audi AG responsible for China operation.

Although FAW was not available to comment on the deal, analysts say money isn't the major issue in this stake adjustment.

As the flagship in China's automobile industry, FAW has easy access to funds, said Zhang Xin, a senior analyst with the Guotai Jun'an Securities Company.

"What FAW should want most is a technology transfer instead of the introduction of new models of Volkswagen cars," said Zhang.

If the deal goes in FAW's favour, this new breed of joint venture with closer technical co-operation will likely boost China's automobile industry.

"Other automobile joint ventures may feel some pressure and would probably reconsider their alliance strategy with their Chinese partners," Zhang said.

For Volkswagen, analysts say, the stake restructuring if it is not the most important move in their expansion strategy will surely help the company safeguard its leadership in the Chinese market.

Volkswagen sold 697,258 cars in China last year, a rise of 36 per cent. But its market share in China shrank to 30.9 per cent last year from 54.2 per cent three years ago.

And its leading status is facing more challenges from other international auto giants which have set up a slew of joint ventures with Chinese partners in the past two years and undertaken ambitious plans to increase their manufacturing capacity in China in the coming years.

Amid such fierce competition, Volkswagen has mapped out an aggressive expansion strategy to maintain a 30 per cent share of the Chinese market, which it just cannot afford to lose.

The strategy includes increasing production capacity in China, introducing new models and strengthening sales and service networks.

It aims to produce 2 million cars annually by 2007 or 2008 in China with the help of its bold investment scheme, which consists of investing 6 billion euros (US$7.4 billion) in the coming five years.

Over 240 million euros (US$278 million) will go to a new engine plant in Shanghai in co-operation with Shanghai Automotive Industry Corp.

It is also planning to set up a chassis component joint venture in Changchun with Volkswagen holding a 60 per cent stake.

VW will continue introducing technology know-how to speed up the local production of components, which is the best way to offset the risk of the fluctuation of the euro, Weissgerber said.

More local content will minimize the impact of sharp foreign exchange fluctuations on imported components, he said.

Volkswagen has also devised a new product strategy for the Chinese market within the next 5 to 10 years, hoping to launch new products to gain a foothold in untapped markets.

For example, Shanghai VW plans to produce the Touran, a multi-purpose vehicle, and FAW VW will produce urban cargo wagons.

Volkswagen's China expansion has received some supports from its financial arms as it got the approval from the China Banking Regulatory Commission earlier this year to prepare for the car financing business in China. General Motors and Toyota's applications were also approved by the commission.

Helge Hiller, an official with Volkswagen Financial Services AG, said it plans to begin operations this summer with the establishment of a wholly owned branch in Beijing.

In terms of promoting car sales, such financial companies can become successful easily, said Guotai Jun'an's Zhang. "But they must be aware of the high risk in such loans as China still lacks sound credit rating system."

He predicted that it is impossible for foreign car financing companies to gain profits within two to three years.

"Being cautious is the best alternative for them," Zhang said.

Echoing Zhang's view, Hiller said that it will take time for the financial company to develop its own credit rating system in China.