Ford Motor Company (F), General Motors Company (GM): Volkswagen, King of The Chinese Road

Last month I wrote about Ford Motor Company (NYSE:F)’s China Strategy, highlighting the important trends in the Chinese market, and how important it was for Ford Motor Company (NYSE:F), a late entrant, to gain market share in the world’s largest auto market.

As fast as Ford Motor Company (NYSE:F) is likely to grow, it’s worthwhile to take a closer look at the Chinese auto market leader Volkswagen and see what they have planned for the next decade to remain the market leader.

In 2012, Volkswagen outpaced the Chinese Auto industry handily, growing 25% compared to the country’s 9%, losing out only to Ford Motor Company (NYSE:F), which came off a much smaller base.

Volkswagen has been in China for 28 years, and still continues to have a first mover advantage, having built up extensive dealerships and a vast knowledge of Chinese customers’ taste and preferences. Much of its success comes from building cars to reflect these choices. Besides, it has not stinted on making 95% of its models, and all of its latest models, available in China. China is actually Volkswagen’s largest market, accounting for 2.8 million out of its 9 million vehicles sold in 2012.

Key growth drivers in China

Volkswagen forecasts the Chinese auto market to grow at a CAGR of 6%-8% in the next eight years from 2013-2020, and its production and sales to grow faster, between 8%-9%.

In Q1, 2013, Volkswagen grew sales 21% compared to Ford Motor Company (NYSE:F)’s 54%, increasing its market share 0.6%, while Ford Motor Company (NYSE:F) grew 1.3% and Hyundai 1.5%.  General Motors Company (NYSE:GM) and Toyota Motor Corporation (ADR) (NYSE:TM)’s lost 0.5% and 1.4%, respectively.

The Chinese government in its typical top-down fashion wants to “encourage”

• Consumption-driven demand
• Emphasize domestic production, with more focus on innovation
• De-emphasize imports of products that can be made in China
• Expand further out into the hinterland, with emphasis on Metro urban hubs or mega cities
• Be more selective of foreign investments

All these trends help Volkswagen.

• It has 17 plants in the Asia Pacific region, second only to Europe’s 67
• It plans to increase its dealer network by 50% mostly in the West and the South, previously underdeveloped areas, dovetailing into the government’s strategy
• Volkswagen has innovated and developed new technology in building the first long wheel base model for China for the Audi A6L and developing the premium Audi limousine, the Audi 4L, locally
• Further tipping its hat to the rural market, it is opening the new plant in Urumqi in Western China
• Audi was a big reason for Volkswagen’s China success and with China’s luxury car market expected to outpace the US by 2020, expect Audi to remain on top