German auto giant Volkswagen said it will vigorously increase local content of its cars made in China, in the world's fastest-growing car market, to reduce excessive costs brought about by the stubbornly strong euro.

"We plan to increase our local content rate to 80 percent within the next two to three years from its present one, which is roughly 60 percent," said Zhang Suixin, managing director of Volkswagen (China) Investment Co Ltd.

"The plan is to tame our mounting production costs in China as a result of the euro's increasing exchange rate," Zhang told China Daily.

Last year, Volkswagen production costs "suffered a lot"because of the strong euro, he said.

The euro's is now hovering at around US$1.27, compared with US$1.04 in January of last year.

Volkswagen, the biggest carmaker in China, operates two car joint ventures, with the First Automotive Works Corp (FAW) and Shanghai Automotive Industry Corp (SAIC).

"We have to speed up localization of our production to deal with the negative impact of rises in the euro's exchange rate and cut our sourcing costs," said officials from the joint venture with FAW.

Last year, Volkswagen set up two joint ventures in Shanghai with FAW and SAIC to produce engines and gearboxes, mainly for its car production in China.

Other European carmakers' joint ventures are also moving in this direction.

"Increasing local content is one of the best ways to reduce growing production costs brought about by the strong euro," said Miao Wei, chairman of French carmaker PSA Peugeot Citroen's joint venture with another Chinese giant, Dongfeng Motor Corp.

"However, local contents rate in China cannot be elevated overnight. And what will manufacturers of foreign autos do if the euro starts to weaken one day?" said Zhang Xin, an auto analyst with Guotai & Jun'an Securities Co.

"In fact, local content decisions demonstrate foreign automakers' strategy - whether they see China as an important manufacturing base in the long term and whether they are willing to transfer more technologies to their Chinese partners," Zhang said.

Foreign automakers should also pay more attention to the quality of components produced in China if they want to increase their local content rate, he added.

Commenting on recent foreign and domestic reports that Volkswagen will cut its investment in China over the next five years by 1 billion euros (US$1.27 billion), Zhang Suixin stressed: "Our investment plan in China will not change in terms of Renminbi."

Last July, Volkswagen released a five-year (2003-07) plan to invest 6 billion euros (US$7.62 billion) in China.

When discussing the question of the euro's exchange rate at a forum in Germany on January 29, Volkswagen's chief executive Bernd Pischetsrieder said the company will invest 5 billion euros (US$6.35 billion) in China during the period.

"The investment will mainly come from our two Chinese joint ventures' own earnings. We announced the plan based on the euro last year just for the convenience of foreign investors and readers' understanding," Zhang Suixin added.

(China Daily February 9, 2004)