Could China make VW number one?

China is increasingly becoming the key to Volkswagen's ambitions. Already Europe's biggest carmaker, it wants to overtake Toyota as the world's number one car manufacturer by 2018 as it invests 4 billion euros ($5.8 billion) over the next few years to expand in China.

The investment is part of Volkwagen's plan to reach sales of more than 2 million units a year in China by 2018, and it comes in line with an overarching plan to become the world's biggest car manufacturer by the same year.

"Demand for our models is growing so dramatically that our capacities in China are no longer sufficient," said Volkswagen Chairman Martin Winterkorn. "Our investment decision has laid the foundations for continuing the group's success in China in the future."

Volkswagen's Chinese sales rose by 22.7% year-on-year in the first half of 2009, and the company looks set to smash the 1-million-unit barrier for the year, according to a note from think tank IHS Global Insight. "With the expanded plants set to herald new models, VW may continue to pursue this strategy in order to capture even more sales," it told clients in a note.

Analysts say that along with scale in China, Volkswagen can benefit from increasing problems hitting the world's current number one carmaker, Toyota.

On Monday the Japanese carmaker said it expected its sales in Europe to remain flat or decline further in 2010, from 2009. To add to Toyota's problems, the company has already bled $5 billion in fixed costs and material expenses and is expected to have an even wider negative cash flow.

"Only a year ago everyone was laughing at VW and its statement of wanting to be number one," said Gregor Claussen, an analyst with Commerzbank in Frankfurt. "But that goal is now becoming increasingly more likely."

So far this year, Volkswagen has seen its global market share rise to 11.7%, with only a 2.1% drop in sales this year from its 6.3 million units sold in 2008, compared with a 14% slip in sales for the whole industry, according to VW's Winterkorn.

Meanwhile, Toyota expects to sell 6.6 million units this year, 3 million cars fewer than its potential capacity. Toyota had sold 9 million vehicles in 2008, according to BMI Western Europe Automotive Insights.

Volkswagen posted a net profit of 283 million euros ($414 million) for the first half of the year, while Toyota posted a loss for its first fiscal quarter ending in June this year.

"VW is in very good shape to overtake Toyota in terms of global sales," said Michael Punzet, an analyst with DZ Bank. "It is very difficult to say when, but they will definitely be number one by 2018."