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Volkswagen China has shifted into top gear in the race to meet the seemingly insatiable demand for new cars in the Chinese market.

The expansion fever hitting the largest carmaker in China is also fuelled by mounting production from other international automakers and the anticipation of increasing imports as tariff and quota barriers are progressively removed in line with China's commitments to the World Trade Organization (WTO).

In an exclusive interview with China Daily, Zhang Suixin, managing director of Volkswagen (China) Investment Co Ltd, says that the rapid growth in the demand for new cars in the past several years has been spectacular.

In 2003, new car sales in China jumped a whopping 80 per cent from the previous year to 2 million units, Zhang says.

There is no indication that the car buying fever is losing steam.

Despite this strong demand, prices for nearly all models on the domestic market have been going down.

"This is an unnatural development," Zhang says. But, he added, the reason behind it seems rather straight-forward.

"Manufacturers are pressured into cutting prices on their old products as more and more new models are introduced," he says.

"Some low-level players have to cut prices to boost sales as a result of a great surplus in overall car manufacturing capacity in China," he adds.

Foreign and domestic automakers, including Volkswagen, are speeding up investment to increase their manufacturing capacity in China and many Chinese non-auto companies are also rushing into the lucrative business.

Vehicle manufacturing capacity in China will top 14 million units a year by 2007, but annual domestic demand will reach 7 million units by then, according to a report from the National Development and Reform Commission, the main watchdog of China's auto industry.

"China's car market is in disorder and I expect the new governmental policy for the industry will make it orderly," Zhang says.

There are more than 120 vehicle plants in China, and many of them are producing less than 10,000 units a year.

At this point, the long-awaited automotive policy is still trapped in bureaucratic red tape.

Automakers' price cuts are also driven by increasing vehicle imports, according to Zhang.

Under its WTO obligations, China cut the tariffs on auto imports to 34.2-37.6 per cent from 38.2-43 per cent on January 1. The quota will increase by 15 per cent to some US$11 billion this year and will be cancelled in 2005 at which point the tariffs will drop to 25 per cent in 2006.

"We must increase our production capacity to meet demand or risk losing market share," says Zhang.

For example, Volkswagen's market share in China is shrinking although its sales are growing rapidly.

"It's a natural development with the entry of almost all the world's major automakers in China after its WTO accession," Zhang says.

He adds that Volkswagen's sales in China stood at almost 700,000 cars last year, up from 510,000 units in 2002.

The sales accounted for some 35 per cent of the domestic passenger car market, down from 50 per cent three years ago.

Over the past two years, foreign automakers, including BMW, DaimlerChrysler, Nissan and Hyundai, set up a slew of joint ventures with Chinese partners.

Other big names, such as General Motors, Toyota, Ford, Honda and PSA Peugeot Citroen, also announced new aggressive plans to increase their manufacturing capacity in China over the next several years.

"However, we will do our utmost to safeguard our leadership in China in the coming years amid fierce competition and we have confidence in our business for the long term," Zhang says.

"We will depend on increasing our capacity in China, introducing new models and strengthening sales and service networks instead of price wars," he says.

Volkswagen, the first foreign automaker producing cars in China, plans to invest 6 billion euros (US$7.4 billion) to increase its annual production capacity in China to 1.6 million cars within the next five years.

"Volkswagen has made a new product plan for the Chinese market within the next 5 to 10 years," Zhang says of the company that launched its exports to China in 2002.

The company produces around 10 models, such as the Golf, Passat, Polo, Bora and Audi A4, at its two joint ventures with First Automotive Works Corp in Changchun and Shanghai Automotive Industry Corp -- two of China's biggest automakers.

"China's car market is still very price sensitive and we will certainly follow the market development in China. But we will try to keep our prices stable," Zhang says.

"Price wars will do harm to all players," he adds.

Zhang seems cautious to predict the volume of China's passenger car market this year, although analysts estimate it will grow by more than 50 per cent.

"It's hard to forecast because the market is changing rapidly and there will may be some uncertainties," he says.

"In the long run, I believe the market will grow by 10-15 per cent a year," he says.

Zhang says sales and service will be increasingly important as competition escalates in China's car market.

To become more competitive, Volkswagen's application for a car financing business in China was approved by the China Banking Regulatory Commission at the end of last month.

The company says that it will set up a wholly-owned branch in Beijing and will start business during the first half of this year.

"We pin great hopes on car financing to boost our sales in China in the long term," he says.

General Motors and Toyota's application was also approved by the commission.

As another measure, Volkswagen's two joint ventures have built hundreds of dealerships and after-sales stations across China.

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