Volkswagen (VW) has confirmed that it aims to begin production at its new Chinese plants within the next three to four years, fast-tracking plans to significantly enhance production capacity in the country.
IHS Automotive perspective | |
Significance | VW aims to strengthen its presence in China, further crowding out competition, with production targets to rise above the 4-million mark. |
Implications | VW is likely planning to launch a number of new models for local production in China using its Audi and VW brands, thus raising the question of local production of Porsche. |
Outlook | The two new plants under the FAW-VW joint venture (JV) will use a stream of VW-related engine and transmission plants located in proximity to the new plants in Tianjin and Qingdao. |
VW has announced that, together with its JV partner FAW Group, two new plants will be constructed along the east coast of China. The automaker announced the plans on 7 July 2014, with the new plants to be constructed in the port cities of Qingdao and Tianjin (see China: 7 July 2014: VW to open two new plants in China with FAW).
Impact of FAW-VW's new production plants
The two new vehicle production plants are being fast-tracked to begin construction so that the start of production at the plants is a couple of years before 2020. In an email statement sent directly to IHS Automotive, the automaker gave further details of its plans to increase production capacity in its largest global market. "For both plants, we are working closely with our partners to complete necessary procedures and preparations for the start of construction. At present, we are planning a start of production in 2017/18," the automaker's spokesperson for China, Larissa Braun, stated in the email.
The two new plants will be built "step by step", with a total investment of EUR2 billion (USD2.72 billion). This indicates that the plants will likely be built in two or more phases, with the first phase allowing lower volume production to begin as soon as 2017 or 2018.
The locations of the two plants have been chosen due to accessibility to the DSG transmission plant in Tianjin, which is expected to begin production this year. Local media in China has reported that VW has invested EUR927 million in the new transmission plant located in the Tianjin Economic-Technological Development Area (TEDA). The plant began construction in 2012 and will be the second DSG production facility for VW in China, following the Dalian transmission plant in Liaoning province. The DSG plant in Tianjin will produce the DQ380 and the DQ500 DSG transmissions, according to a variety of local Chinese media citing company officials and the TEDA. The plant is said to have annual capacity for 450,000 units, with the DQ500 transmission reportedly to be used for models produced by Shanghai Volkswagen (SVW), such as the Tiguan, while the DQ500 will be fitted in FAW-VW models, such as the Audi Q3.
VW has also opened engine plants in Dalian and Changchun. The Dalian engine plant was opened in 2011 with partner FAW, with the partnership investing EUR10.9 million in the plant, VW's first engine reprocessing plant in China. As 70% of the materials in an engine can be reused, engine reprocessing also saves large quantities of raw materials such as steel. The plant had capacity to reprocess 15,000 engines per annum in 2011. The project in China is the Group's first reprocessing facility outside Germany. The next step will be the expansion of activities at Dalian to include other engine models, as well as transmissions. In addition, a test centre for engines and transmissions with reference to Chinese driving habits is to be established in the future, the automaker said in August 2011 at the opening of the plant.
Meanwhile, VW opened a new engine plant in Changchun, also with FAW, in 2013. The new plant, called Volkswagen FAW Engine Dalian Company, now produces the EA888 engines, manufacturing 1.8-litre and the 2.0-litre variants. It covers a total area of approximately 94,000 m2 and annual production capacity in the first phase will be 300,000 units of the EA888 engine. From mid-2014, capacity will increase to 450,000 units under the second production phase, the automaker said in a statement released at the opening of the facility.
The strong commitment between VW and partner FAW was extended in 2012 beyond the 2016 expiry date. The JV, FAW-Volkswagen, began its first production of the Jetta in Changchun in 1991.
Outlook and implications
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© IHS Automotive |
The reasons for VW to further expand its foothold in China align with IHS Automotive's current forecasts for the automaker, which show that without the additional new facilities, the growth trajectory for the automaker in China is set to slow. VW aims to bring in more products, enhance its market penetration, and strengthen growth forecasts, while crowding out the competition in China. The presence of two production plants at port cities also lends itself to VW using the plants as potential export bases for markets beyond China.
IHS Automotive currently estimates that the two new FAW-VW plants could bring in 300,000 units per annum (upa) of increased production capacity each, with the potential to rise to 600,000 upa per plant, as is the case with its other new plants in China. The new FAW-VW plant in Foshan (Guangdong Province) will see upa of 600,000, as will the new SVW Ningbo plant (see China: 9 June 2014: VW begins expansion of Ningbo plant;7 May 2014: VW begins construction of Foshan plant phase 2; and 31 March 2014: VW strengthens commitment to China).
VW Group is expected to see slowing growth rates from 15.67% for local production in 2011 to 10.95% year on year (y/y) in 2014, and further to 1.54% y/y in 2020.
VW's current plant production status
VW Group will have 12 plants operational in China from 2015 (currently 11 plants are operational):
- FAW-VW
- Foshan Plant in Guangdong Province
- Changchun 1 Plant in Jilin Province
- Changchun 2 Plant in Jilin Province
- Chengdu Plant in Sichuan Province
- NEW Plant in Qingdao (planned)
- NEW Plant in Tianjin (planned)
- SHANGHAI-VW
- Changsha Plant in Hunan Province (SOP 2015)
- Nanjing Plant in Jiangsu Province
- Yizheng Plant in Jiangsu Province
- Shanghai 1 Plant
- Shanghai 2 Plant
- Shanghai 3 Plant
- Ningbo Plant in Zhejiang Province
- Urumuqi Plant in Xinjiang Province
In China and Hong Kong, the VW Group sold over 3 million units during 2013. The SVW and FAW-VW JVs, together with imported models, saw combined sales of 3.27 million units in 2013, up from 2.81 million sold in 2012 (see China: 13 January 2014: VW delivers 3.27 mil. units in China and Hong Kong during 2013). This includes the 214,100 units that were imported into the market, an increase of 13.2% y/y.
In 2013, VW opened a new plant in southern China's Guangdong province with FAW. In September 2013, the FAW-VW JV opened the 300,000-upa plant in Foshan (see China: 25 September 2013: VW opens new car plant in Foshan, aims to raise sales in southern China). Also in 2013, VW opened a plant in the far-western frontiers of China with partner SAIC. In August, the 50,000-upa plant began production of the Santana in Urumuqi (see China: 30 August 2013: VW begins production at plant in western China). Meanwhile in October 2013, the SVW JV also opened a new 300,000-upa plant in Ningbo (see China: 25 October 2013: VW opens new Ningbo plant). The SVW JV currently operates plants in Nanjing, Shanghai, and Yizheng in Jiangsu province, as well as the plant in Urumuqi in Xinjiang province. A new plant in Changsha in Hunan province is scheduled to be completed soon, with production commencing at the end of 2015 (see China: 16 May 2013: VW begins construction of Changsha plant in China).
Meanwhile, the FAW-VW JV operates plants in Changchun (Jilin province) and Chengdu (Sichuan province), as well as the new plant in Foshan (Guangdong province). Another new plant for the JV is on the cards, but VW has yet to confirm its location.
VW is determined to maintain its top spot as the largest brand by market share in China, and in order to spearhead growth the German automaker is targeting the whole country. By segregating the large Chinese market into different geographical regions, VW can push its penetration into every nook and cranny of China. The automaker's 'Go South' policy aims to target smaller cities, as well as larger ones in the southern provinces, and to gain market share from competitors such as Japanese automakers in the region. Earlier in 2013, VW outlined its EUR9.8-billion expansion plan for China (see China: 24 April 2013: VW outlines EUR9.8-bil. Chinese investment plan).
IHS Automotive forecasts currently show that VW will indeed have production capacity to produce 4 million upa by 2020 in China as a result of expanding its production bases, and with it the company's foothold across the Chinese regions. We forecast the automaker will hit 4 million upa in actual production between 2020 and 2021. With the new plants, VW will aim to rise above the 4-million target and will likely further expand its line-up in China.
VW has not mentioned if it will consider introducing local production of Porsche models in the country, which could also significantly boost Porsche sales in China. Porsche models now see annual sales for certain models over the 25,000-upa threshold that OEMs use to determine whether to invest in a local production facility, while the launch of the imported Macan sport utility vehicle (SUV) could once again bring the question of local production of Porsche models in China to the forefront (see China: 7 July 2014: Porsche launches sale of Macan SUV in China).