Volkswagen to set up a factory in Xinjiang

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Several months ago, one of our insiders at Volkswagen mentioned to use that Shanghai Auto would set up a production facility in Xinjiang, and the factory would focus on the development of electric cars in an oil rich region. This week I passed the same little bit of information to a colleague who completely rubbished it “Who would want to build cars in Xinjiang? It’s nearly 2,000km West of China’s other car making city, Lanzhou? You would be crazy to build in Xinjiang“. He had a point, but then later that day Reuters ran with the story that plans for the factory are at an advanced stage. So why Xinjiang? It has an area of 1.6 million square kilometers, which is about the size of Western Europe but has a population of 21 million, its GDP is just 541 billion RMB putting it 25th in the ranks of Chinese provinces and administrative regions but looking at it from the other end of the spectrum its the sixth poorest province, the entire province accounted for just 1.36% of the country’s entire GDP.

So the question remains, why Xinjiang? Their maybe more factors at hand here than simple desire to make cars for a dusty province at the other end of the country, if Shanghai VW wish to expand capacity in China they may have to give some concessions such as putting factories in economically depressed areas of the country in a bid to boost that local economy. On the other hand, it might actually make sense for VW to make cars in Urumqi, Xinjiang is of course on the border of Mongolia, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Pakistan and Afghanistan, although their may not be much of a market for new VW’s in that market in the near future, their maybe a potential market for VW’s in the other markets though. Take Kyrgyzstan for example, as of 2002 it had some 220,000 cars on the road, it has no domestic manufacturer and relied largely on Soviet era cars although this lowered to just 54% by 2007, auto imports reached a peak of 8,5000 vehicles in 2007 – a paltry amount, but 3.8 times higher than the no of cars sold in 2006, we cant tell you 2010 or 2011 statistics as the Customs Website is under construction, we can say that the no of registrations hit a peak at 29,000 cars in 2004 of which some 19,000 cars were German. So although Kyrgyzstan is a massive market, it does have potential. Would VW be interested in controlling such a market and others around it? Of course. Do they want to set up direct production in those countries? Of course not. Do they want to set up production in China as a potential export base, possibly.

Volkswagen AG is planning to build another manufacturing plant in China and discussions about setting up a facility in Xingjiang province are now at an advanced stage, a person familiar with the matter told Reuters on Wednesday.

A spokesman for Europe’s biggest carmaker said the company is constantly examining the possibility of building another facility in China, where the passenger car market is expected to grow even further.

“Because of that we are always in touch with the corresponding local authorities over there as well as with our Chinese joint venture partners,” the spokesman said, declining to provide any details.

German daily Frankfurter Allgemeine Zeitung reported on Wednesday, citing information from the Chinese government, that the new plant would build cars for the mid-sized segment and would be located in Xingjiang’s provincial capital of Urumqi.

The initial investment of the German-Chinese joint venture Shanghai Volkswagen would be around 230 million euros, the daily reported.

Together with partners FAW and SAIC , Volkswagen has currently nine factories in China, with annual total production capacity of 1.9 million cars.

This year, Volkswagen is aiming to sell more than 2 million cars in the country.