Today China has the largest potential auto market in the world — with nearly all international brands setting up production and operations — but Volkswagen's position is unique. It was the first foreign auto company to enter China and is still one of the biggest brands, with a leading position in the market. It is not only an eyewitness, but also an actor and contributor to the growing auto industry.
And since 2007, China has been Volkswagen's biggest market outside Germany. "We want to keep the leading position in the years to come," says Winfried Vahland, president and CEO of Volkswagen Group China. "Our sales volume target for 2008 is one million. For the long term, we will bring more new technologies, products, and services to Chinese consumers."
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"It has been 30 years since Volkswagen started to get in touch with the Chinese government. Looking back, Volkswagen and China opted to start their respective new eras with the right strategic decision with each other," says Vahland.
Volkswagen has been with China's auto industry since 1978 — the year the country began its economic reform and opening process. It's also the year the Chinese government decided to rev up China's auto industry — it approved a proposal suggesting that China should enhance its auto production level by introducing the latest foreign technologies. The pilot site was in the Shanghai Sedan Plant — one of the few sedan producers at that time — with a goal to turn it into a modern auto production base and then bring along the whole auto industry.
According to a Xinhua News Agency report, former Chinese President Jiang Zemin paid his first visit to Volkswagen's headquarters in Wolfsburg, Germany, that year, the first ever by a Chinese official. At that time, Jiang was an official with China's First Machine-building Industry Ministry. Jiang reviewed the German auto industry and came up with the idea of introducing Volkswagen technology to China. Volkswagen reacted very positively, saying if China would like to cooperate, Volkswagen would not only transfer the technologies but also provide part of the capital.
After the Chinese delegation returned, Volkswagen sent a team to Shanghai to research the Shanghai Sedan Plant and then started the discussions, which lasted six years. Fresh out of the "cultural revolution" (1966-1976), there was no integrated legal system to follow in China, especially for business. Furthermore, although in 1979 the Chinese government started to permit the ownership of private automobiles, in the early 1980s, even owning a bicycle was still a luxury for many people. With an average salary of less than 50 yuan per month, nobody dared to dream of owning a car.
To test the production cooperation, the two parties eventually agreed to first assemble 30,000 of Volkswagen's sedans in Anting, on the northwest outskirts of Shanghai. After signing a contract in 1982, the first Volkswagen Santana auto rolled off the assembly line a year later. In October, 1984, during former German Chancellor Helmut Kohl's visit to China, the joint venture contract between Shanghai Automotive Industry Corp and Volkswagen was eventually signed, under a term of 25 years. "The 50-50 investment measure and most terms in the Shanghai Volkswagen contract later became the main items in China's joint venture law and continue to be used by most ventures today," says Zhang Suixin, executive vice-president of Volkswagen Group China.
"We started everything from scratch. Parts supply chain, qualified staff, related legal systems and many other things in the industry appeared along with the foundation of Shanghai Volkswagen (SVW). China's automotive industry was far below the international average level 30 years ago," recalls Vahland. However, "the birth of SVW put an end to China's history of making cars behind closed doors at a low technical level and blazed a path of utilizing foreign capital and introducing overseas technology for an accelerated development of the Chinese car making industry", he says. "While commenting on the past development of Volkswagen in China, external sources have been quoted as calling Volkswagen the company that helped to ‘put China on wheels'."
While expanding its production scale, SVW started the Santana endeavor to revitalize the Chinese parts supply industry. When Santana first came to Shanghai, SVW found that there were no parts plants that could support them in the country, all production lines needed to be reconstructed, thousands of car parts except tires, radios and tape decks, speakers, antennas, and logos, depended on imports, and the localization rate was only 2.7 percent. Under the circumstances, the entire project could have been defeated by high tariffs and the cost of some accessories. SVW's drive to get parts made in China also began to clear the way for the entire Chinese auto industry.
They stuck by the principle of the "China Brand" and "no substitutions", and established an institution that regularly met to localize Santana and the domestic supplies rate eventually rose from 2.7 percent to the current 98.9 percent. SVW's auto parts support network in China now has 400 members in 20 provinces and cities. SVW is not the only winner. Its actions also established the base for China's car parts industry.
After former German Chancellor Gerhard Schroeder visited Shanghai Volkswagen in November, 1999, he said, "Shanghai Volkswagen is the successful apotheosis of the Sino-German cooperation." In 1991, Volkswagen established its second joint venture with First Automotive Works. In December, the first Jetta sedan, Volkswagen's star model, rolled out of the production line in Changchun, Jilin Province. Four years later, the German automaker made the decision to bring its luxury brand Audi in the joint venture, and in 1996 the first Audi 200 V6 hit the Chinese market.
When Audi's star model A6's came into the market in 1999, the locally-produced sedan with a competitive price soon won the luxury market with sales of record 6,911 units that year. Since then, Audi has kept its leading position and was the first luxury sedan brand to break the sales barrier of 100,000 autos in China in 2007, far ahead of its international rivals Mercedes-Benz and BMW. In 2005, Volkswagen introduced another brand Skoda to Shanghai Volkswagen and in 2007 the made-in-China Skoda Octavia came on the market. In the first half of 2008, the company sold more than 500,000 cars in China and Vahland says he is confident that the one million mark will be reached by the end of the year.