GENERAL Motors (GM) grabbed headlines recently with its US$1 billion agreement to set up a joint venture to make cars in China, but Volkswagen of Germany is already racing ahead. Volkswagen, which accounts for 51 per cent of all car sales in China, plans to launch three new models of its mid-range and luxury cars between next year and 1998. This will be about the time when the first GM Buick Regal will roll off the assembly line in Shanghai. They include a more modern-looking luxury Audi next year, and a new generation of technologically advanced Audi and Santana models in 1998. Volkswagen Asia-Pacific chairman Martin Posth said: 'We like competition and we don't view GM as a threat. We see them as a challenge. 'Audi's motto is 'Advancement through technology'. With a new generation of cars, we can beat our competitors.' During German Chancellor Helmut Kohl's visit to China last week, Volkswagen laid the initial investment framework for its strategy: a 650 million deutschemark (about HK$3.57 billion) joint venture with the mainland's First Automobile Works. Audi, Volkswagen's luxury car unit, will hold a 10 per cent stake, while Volkswagen will own 30 per cent and First Automobile 60 per cent. To boost its competitiveness in the luxury car market, Audi will launch a new version of its Audi 100, with a redesigned body and new V6 engine, in the middle of next year. The new factory in Changchun, Jilin province, will have an initial capacity of 30,000 cars and 60,000 engines, with 70 per cent domestic content. The output should rise to 60,000 cars and 100,000 engines by 2000. 'In the past, we ran our Audi business under a licence agreement. Our influence over product quality was rather low. But as a joint venture, we will have much more influence,' Mr Posth said. The next phase of Volkswagen's strategy is more ambitious. The company expects to leapfrog one generation of Audis in 1998 and come out with a new, technologically advanced vehicle capable of competing directly with GM's 1997-model, mid-sized Buick. A portion of the investment for the new car is covered under last week's 650 million-mark agreement, but Mr Posth said total costs could run higher. Volkswagen's other joint venture, Shanghai Volkswagen, which turns out the old-fashioned but popular Santana, is designing a sedan for release in 1998. Much of that work will be carried out at a 350 million yuan (about HK$325 million) research and development centre, which will be set up next year. It will be supported by annually re-investing three per cent of the company's turnover. 'Our strategic vision is that we will come up with cars engineered and designed between Germany and China with the latest technology, produced in China and exported to the Southeast Asian market, which Japan and South Korea now dominate. By 2003 we even hope to have exports to Japan,' Mr Posth said. With the support of Mr Kohl, Volkswagen has invested more than four billion marks in China since signing its first joint venture in 1984. Shanghai Volkswagen is expected to produce 160,000 cars this year, 220,000 next year and 300,000 by 1997. By 2000, Volkswagen plans to produce 660,000 Santanas, Audis, City-Golfs and Jettas in China. Volkswagen has reduced its exposure to the foreign currency risk of a strong mark by raising the domestic content of its old Santana model to 87 per cent, its Audi to 70 per cent, and its Jetta to 60 per cent. By 2000, it expects 90 per cent of the components for its cars to be domestically produced. The company has more than 400 registered service stations in the country and the flexibility to cut prices on its cars to remain competitive if necessary. By contrast, GM's project is still in its infancy. Although it defeated Ford late last month to become Shanghai Automotive Industry Corp's partner in the sedan production venture, GM has yet to choose a plant site, complete a feasibility study, line up financing or even set a date for forming the venture. But Volkswagen is not taking any chances. It already faces competition from Tianjin Daihatsu, Chrysler, Peugeot and Citroen, as well as imports. Daimler Benz of Germany has also won approval for a US$1 billion multi-purpose vehicle project in Guangdong province. Analysts said the biggest threat to Volkswagen in the short term might not be GM, but limited demand in the domestic car market. The average urban household has an annual income of 8,900 yuan, of which more than half goes towards food and clothing. A new Santana 2000 retails for 220,000 yuan. China plans to increase annual production of passenger cars from 250,000 last year to about 1.5 million by the end of the decade and four million by 2010. Industry analysts feared China's admission to the World Trade Organisation could open the floodgates to imports, reducing the competitiveness of China-made cars. Mr Posth, who had just returned from his trip to Beijing with Mr Kohl, doubted whether China would allow that to happen, despite American demands for greater market access. 'I have yet to see a country destroy its existing or developing car industry. There must be a balance,' he said. Mr Posth predicted continued protectionism in China's car industry for five to eight years, while the mainland strengthened the international competitiveness of its components manufacturers and streamlined management.