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Volkswagen raises the stakes in China

Volkswagen’s investment plans for the next five years tell one story very clearly – the company is becoming ever more dependent on growth in China in its bid to overtake Toyota as the world’s number one carmaker.

For the first time in years, the planned increase in investment by VW’s two Chinese joint ventures – internally financed through their own cash flows – is set to accelerate, even as Volkswagen becomes dangerously exposed to a slowdown in China.

While the overall budget has grown on an absolute basis, average annual investment plans in China have slowed down each year until now, from 44 percent growth in 2010 to 32 percent in 2011 and down to 17 and 11 percent, respectively, for the past two years.

Now it is set to jump over 20 percent to  €4.4 billion per year, just when China’s light-vehicle market has been losing momentum.

This might make sense after the company blamed a forecast drop in sales growth this year – to an estimated 10 percent – on a conservative strategy that has caused production bottlenecks.

But even with these capacity constraints, the country’s importance to VW continues to expand due to weakness elsewhere. Volkswagen sold more cars in China during the first nine months than it did in western Europe and the U.S. combined, most likely the first time that has ever been the case.

During this period, car sales to China comprised 38 percent of group volumes, up more than 3 percentage points from the same period a year earlier. By comparison, in 2010 only about every fourth Volkswagen group car was sold in China.

If anything, the knowledge that VW is becoming ever more reliant on China for its growth could strengthen the Chinese government’s hand when it comes to VW’s attempts to negotiate increasing in its 40 percent stake in the FAW-Volkswagen JV to parity – talks that have stalled, according to reports from Reuters.