Volkswagen's Vahland has some tough tasks ahead

SHANGHAI -- A number of Chinese industry associations recently named Winfried Vahland, CEO of Volkswagen Group China, as one of China's top 10 managers of 2007.

The honor is well-deserved.

Vahland has done a good job bringing down costs. But he is still grappling with one of Volkswagen's biggest burdens in China: working with two partners who are competitors. And in China's competitive market, Volkswagen can't afford that.

When Vahland took the helm in July 2005, the company was struggling due to high purchasing costs. He quickly initiated a cost-cutting project known as the Olympic Program.

Vahland relentlessly sought more local content in VW vehicles sold in China while maintaining quality control on locally sourced parts. He also pushed VW's two joint ventures, Shanghai Volkswagen Automotive Co. and FAW-Volkswagen Automotive Co., to reduce purchasing costs through joint procurement.

At the same time, Volkswagen began customizing models such as the Passat Lingyu for the China market.

VW now holds 18.5 percent of China's market, 8.8 percentage points more than archrival General Motors.

But Volkswagen faces trouble down the road. About half of VW's products in China are in one segment, selling for about 100,000 yuan ($14,200) per unit. And both Shanghai VW and FAW VW have announced they will launch cars belonging to the same segment later this year.

These products may end up competing with each other and waste company resources.

While Volkswagen is selling more cars in China, competitors like Toyota are quickly catching up. Last year Toyota's sales in China went up 62 percent year-on-year. It has now grabbed nine percent of the China market.

Volkswagen has recovered from the self-induced sales slump it experienced in China. But to keep the growth it now enjoys, Vahland needs to keep working on the partnership issue.