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VW is hoping to sell cars in less-populated areas of China in a bid to be the world’s largest automaker.

VW enters rural west China

Sees small towns as aid to become No. 1 automaker

– As Volkswagen plots a course toward its goal of becoming the world’s biggest automaker by 2018, it’s increasingly clear that the path to global dominance runs through places like Lanzhou, in western China.

The capital of landlocked Gansu province, which borders the Gobi Desert, is home to a total of 11 dealerships for VW and its sister brands, Audi and Skoda. With a population of 3.6 million, and GDP per capita of about $4,100, Lanzhou is the type of smaller city away from China’s prosperous east coast that VW is targeting in its next phase of expansion.

“Volkswagen’s early entry into China meant that our outlets focused on bigger, developed cities,” said Soh Weiming, the carmaker’s China executive vice president. “Now, we have to expand beyond them.”

Less-developed Chinese cities are VW’s “bread and butter,” Soh said at last month’s Guangzhou Autoshow.

Increasing sales in such far-flung places is the primary challenge facing Jochem Heizmann, who took over as VW’s China country head on Sept. 1.

The appointment of Heizmann, a former trucks chief and head of production planning at the company, underlines the importance of China in VW’s plans to overtake General Motors and Toyota. It is also the first time that VW’s executive overseeing China has been on the company’s group management board, a move VW says increases flexibility and streamlines its daily business there.

VW intends to consolidate its lead with aggressive investment that outpaces that planned by rivals. VW’s China ventures have pledged to spend 9.8 billion euros ($12.6 billion) in China through 2015, while GM says it will invest as much as $7 billion in the five years to 2015.

The German company expects that spending differential to help it win over the next wave of Chinese car buyers, made up of mostly first-timers who have little brand allegiance.

“Chinese consumers are notoriously disloyal,” said Bill Russo, president of Synergistics, a market researcher in Beijing. “Volkswagen’s challenge is continuing to build customer relationship management, and be geographically in the high-growth regions.”

China’s smaller cities will account for 60 percent of new car deliveries by the end of the decade, up from 40 percent in the past 10 years, McKinsey & Co. predicts. Car sales in so- called third- and fourth-tier cities will grow about 10 percent annually until 2020, versus 4 percent a year in Shanghai and Beijing, McKinsey said.

The country, already the world’s largest auto market, is set to grow in importance, as a drawn-out debt crisis weighs on vehicle sales in Europe.

“Globally, growth will be a bit slow,” Heizmann told reporters on Nov. 21. “China is different,” he said. “In China, every business, every brand is selling especially well.”

Trained as an engineer with a doctorate from Karlsruhe University in Germany, Heizmann, 60, is no stranger to the country.

He oversaw factory expansion in China almost two decades ago when he was in charge of planning and commissioning new passenger-car plants at VW. From 2001 to 2007, Heizmann oversaw global production for Audi, which now counts China as its biggest market. In 2004, he was made a guest professor at Shanghai’s Tongji University, which has a research partnership with Audi.

Volkswagen’s China sales will reach almost 2.7 million vehicles this year, or about 30 percent of its global total, Norddeutsche Landesbank predicts.

“For 60 years, the most important market for VW was Germany; they sold around 1 million cars there,” said Norddeutsche Landesbank analyst Frank Schwope. “Four or five years back, China overtook the German market. Now VW is still going to sell 1 million cars in Germany, but 2.7 million cars in China.”