VW enjoys market leadership in China
VW has enjoyed first mover advantage in China. Its early investments and decision to
persevere through difficult times in the 1980s and 1990s have been rewarded with
leadership in the world’s fastest growing and most coveted market. While other OEMs
are still formulating China strategies, VW is already well underway to selling almost
1 mn units a year, at very satisfactory margins.
VW is more reliant on China profits than previously realised
The high level of profitability enjoyed so far in China has been driven by high, tariffprotected
prices, rather than low costs. A booming market has played into VW’s hands as
its market share strength, installed capacity and more advanced distribution have allowed
it to supply soaring demand. Higher sales have not been matched as closely as hoped by
rising profits (Chinese EBIT in 2002 was little higher than in 2001, despite volumes up
over 40%), but the level of earnings has still risen and US profits have fallen to a level
that has made China a key contributor to the Group’s bottom line.
We believe the importance of Chinese profitability to VW remains poorly recognised. As
US and UK profits collapsed with the move in the euro, and European margins fell
further as pricing weakened for VW, China has been left standing as the only real
remaining profit centre (other than spare parts in Europe). We estimate China contributed
over 70% of 1H earnings at VW and could contribute c.70%-80% of full year EPS.
Chinese earnings derive from two sources
VW reports profits from China in two areas. Neither are that transparent, but together we
estimate they contributed up to EUR542 mn of net earnings in the first nine months of
2003, out of a total of EUR813 mn of net earnings for the Group. These two sources are:

 Equity income from the Chinese JVs. VW has joint ventures with SAIC (50%
stake) and FAW (40% stake). Both are profitable and VW books its share of profits
as equity income. VW only publishes quarterly proportional EBIT for the JVs, but
this figure correlates closely to equity income.