One important factor in VWs decline has been a marked shift to private demand in China from government demand, which had underwritten the markets early growth.
With deep-pocket government buyers now a minority in the market, VW and other makers have had to adjust to the needs of price- and equipment-sensitive private buyers by slashing prices and bringing in new models.
To defend its turf and try to stop the slide, VW is investing more in China and is moving to better integrate the operations of its two joint ventures.
The two ventures maintain separate distribution channels and each has traditionally viewed the other as a competitor rather than an affiliate.
VW invested $2 billion in China from 1984 through 1998. It has vowed to spend another $8 billion by 2008 to expand its capacity to 1.6 million units a year, to add new models and to build two more engine plants and expand the existing one.
Volkswagen is working on a number of models that are suitable for the China market, says Paul Blokland, director of the Segment Y automotive consultancy in Bangalore, India. They include a car that costs E3,000 to produce that
would be aimed at China, India and Russia.
VW also will launch the Skoda brand in China in 2007. The Czech automaker is the low-cost producer in the VW group stable and could yield a competitive edge for VW in Chinas increasingly price-sensitive marketplace.
Skoda has by far the cheapest models at Volkswagen, says Borgonjon. [But] its success will depend on how they distribute it. Can they control distribution?
PSA, meanwhile, is experiencing a renaissance in China.
Buoyed by the reintroduction of the Peugeot brand, sales of Dongfeng Peugeot Citroen in 2005 were up 57.5 percent over a year earlier to 140,399 units.
PSA launched the Peugeot 307 in mid-2004, and also launched the 206 in January.
It will introduce two Citroen models this year as part of an $800 million plan to raise capacity to 300,000 units a year by the end of 2006.
China is one of PSAs three main strategic growth markets worldwide, said Yves Boutin, the French groups representative in China.
Despite the onslaught they face in the volume segments, European brands still rule Chinas luxury car segment, small though it may be.
Volkswagen introduced the Audi brand in China in 1995 and it has been the luxury leader since.
VW sold more than 60,000 locally produced Audi sedans in China in 2004, but sales were off sharply last year. A6 sales were down 8.3 percent to 42,331 units while sales of the A4 tumbled 51.0 percent to 7,770 units, according to Automotive Resources.
Arch-rival BMW, which began local production of the 3- and 5-series models in mid-2004, sold 17,582 domestically assembled cars in 2005, while Mercedes-Benz has just started local production.
But as in the volume segments, the Europeans are once again facing challenges from Asian brands and GM.
Toyota began production of the premium Crown sedan earlier this year and sold 28,248 in 2005, according to Automotive Resources. Toyota also introduced its luxury Lexus franchise into China last year as an import and sells the cars through 15 stand-alone dealerships in major cities.
Other pressure is coming from Honda, which will begin import sales of its premium Acura brand this year; GM, which has begun producing the Cadillac CTS and SRX in Shanghai; and DaimlerChrysler, which has targeted sales of 25,000
locally assembled Chrysler 300C sedans a year here.
Even so, analysts say they expect the Europeans to continue to own the luxury-car market in China.
The Mercedes and BMW names especially, says analyst Blokland. They still convey more prestige than the Japanese brands.
– James R. Crate contributed