This Could Crush General Motors Company (GM)’s China Chances: Volkswagen AG (ADR) (VLKAY)

As the PR minions at General Motors Company (NYSE:GM) are fond of pointing out, GM currently holds the leading position (by market share) of the two largest automotive markets, China and the U.S.

GM’s lead in the U.S. is probably safe, at least for now. But in China, GM is at risk of falling behind the company that is fast becoming its most dangerous global rival: Volkswagen AG (ADR) (PINK:VLKAY).

Volkswagen AG (ADR) (PINK:VLKAY) is making a big move in China
Despite gains by Toyota Motor Corporation (ADR) (NYSE:TM) and Ford Motor Company (NYSE:F) , General Motors Company (NYSE:GM)’s No. 1 position in the U.S. doesn’t seem likely to be under serious threat any time soon. While the General has lost some market share since its 2009 bankruptcy, it has a slew of new products due over the next couple of years. If they’re well-executed – and signs so far are mostly good – GM should be able to put some extra daylight between itself and its key rivals.

But the story is different in China. While Toyota is falling far behind the General, and Ford is still playing catch-up, GM arch-rival Volkswagen AG (ADR) (PINK:VLKAY) is investing big – and could blow right by GM before too long. Volkswagen AG (ADR) (PINK:VLKAY) CEO Martin Winterkorn said on Thursday that the company plans to build at least seven new factories in China over the next few years, as it aims to increase its China production 60% by 2018.

China, where Volkswagen AG (ADR) (PINK:VLKAY) has carved out a significant presence and sells nearly as many vehicles as General Motors Company (NYSE:GM), is a hugely important market for Germany’s largest automaker. As VW (like most of its regional rivals) continues to struggle with the deep recessions that have crushed new-car sales in Europe, where it is the market leader, it’s increasingly looking to China – as well as North America – to drive growth in coming years.

Big profits for the German giant
That growth has been happening. Volkswagen AG (ADR) (PINK:VLKAY) earned 11.5 billion euros, or about $14.9 billion, before interest and taxes in 2012, a number that dwarfs the $7.9 billion posted by GM for the year – and the numbers posted by most other global automakers. Simply put, VW’s innovative manufacturing model has led to strong margins – margins that could strengthen further as it continues to implement its approach around the world. Already, VW has posted three solid years of profit growth – and despite a worsening climate in Europe, it expects to post similar profit totals in 2013.