Winfried Vahland has a reason to grin. He has turned Volkswagen's ailing China operations around in just one year.

Since the 49-year-old Vahland launched a radical restructuring plan in October last year, the German carmaker has regained sales growth and made big progress in cutting costs in China. He was appointed president and chief executive officer of Volkswagen China Group in July last year.

In the first nine months of this year, Volkswagen's China sales surged by 28.7 per cent year-on-year, selling 524,558 vehicles.

Also executive vice-president of Volkswagen Group, Vahland said the company's full-year sales will exceed 600,000 units in China.

The figure, although a little conservative, is up from 570,876 units posted in 2005, which marks a rebound from consecutive plunges over the past two years.

The 2006 sales, Vahland said, will enable Volkswagen to lift its market share in China to 17.5 per cent from 17 per cent last year.

"This is far from the 50 per cent share it enjoyed a few years ago, but it is heading in the right direction," he said.

Vahland said Volkswagen has slashed its production costs in China by 20 per cent this year from 2005.

In 2007, he anticipated, the German carmaker will achieve its 2008 target of cutting costs by 40 per cent from last year.

These achievements are the direct result of Vahland's restructuring plan in China, called the "Olympic Programme," The company said the programme is designed to increase sales, stabilize market share, cut costs and strengthen the position of all of the German carmaker's products.

The plan came as Volkswagen - the sole official automotive partner of the 2008 Beijing Olympics - suffered a tumble in sales and market share in China over the past several years due to strong attacks from rivals, its relatively aged line-up and high costs.

Commenting on the implementation of the "Olympic Programme," Vahland stressed: "Speed is the most decisive success factor."

However, the cigar-smoking executive is not puffed up by his success, but cautiously optimistic.

"There's still a lot of work to do, but we are well on our way to becoming the gold medal winner among carmakers in China," he said.

No doubt that Volkswagen, the biggest player in China's car market since the middle of the 1980s, will face more formidable challenges ahead from both increasingly popular Japanese brands and fast-growing Chinese carmakers.

Volkswagen now runs two car joint ventures with Shanghai Automotive Industry Corp (SAIC) and First Automotive Works Corp (FAW) - the two top Chinese vehicle manufacturers.

New products

The German carmaker plans to introduce 12 to 14 new models into the two ventures from late 2005 to 2010.

The venture with SAIC is making Volkswagen's Santana, Passat, Polo, Gol and Touran. It will launch an Octavia compact sedan from Skoda, the Czech unit of Volkswagen, at the beginning of next year. Skoda will also bring its Superb mid-sized sedan and Fabia subcompact car into the venture later.

FAW Volkswagen's existing line-up includes the Jetta, Bora, Golf, Sagitar and Caddy as well as the Audi A6 and A4. Audi is a premium brand wholly owned by Volkswagen. The venture will launch a Volkswagen Magotan mid-sized sedan in 2007.

In the past, Volkswagen Group's products made at the two ventures were perceived as competitors with each other.

To alter the scenario, the German carmaker has differentiated market positioning of its brands: Volkswagen-brand models made at the venture with SAIC target "young urban people and trendsetters"; Skoda is "the mid-range line for trend-setting urban families"; the venture with FAW's products under the Volkswagen nameplate target customers with "high social standing who love original German designs"; Audi is the premium brand for the elite.

Vahland, former vice-chairman of Skoda, said he expects the Czech brand to kick off production in China next year. He says it will be a new "pillar" of Volkswagen Group's local operations as well as the Volkswagen and Audi brands.

In line with the branding strategy, Volkswagen and its two ventures have also restructured sales channels with each brand having its own dealer network focused on different customer demands for products and services.

To meet the needs of increasingly sophisticated customers in China, Shanghai Volkswagen and FAW Volkswagen have launched their own service brands - "TechCare" and "Total Care with Precision," which have both gotten positive feedback.

According to a recent JD Power survey, Audi ranks No 1 in terms of customer satisfaction. FAW Volkswagen and Shanghai Volkswagen ranked No 3 and No 4.

Volkswagen and the two joint ventures now have a total of more than 1,000 dealerships and service stations in China.

Cost-cutting

In the past, Volkswagen's vehicles were relatively expensive when compared to models of rivals in China.

However, analysts said, they will have more attractive prices for Chinese customers with the German carmaker's persistent cost-cutting efforts.

To reduce costs, Volkswagen and its two Chinese ventures have centralized sourcing of all their auto parts.

Volkswagen also plans to speed up sourcing of local parts for its China-made vehicles.

It expects an average of 80 per cent of parts used in its China-made cars will be purchased locally by 2008, up from around 60 per cent at present.

The German carmaker and its two ventures now have a total of 800 suppliers in China.

Despite the rising localization of parts, Vahland stressed that there is "no compromise" on quality of its products made in China.

He said China's parts industry is on a good development trend and will reach a much higher level in the years to come.

Analysts said car prices in China will continue on the downward trend as a result of heating market competition. This will add pressures on foreign and domestic carmakers to cut costs.

(China Daily 11/18/2006 page18)

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