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[devw1wrk@ibmmail.com]

--- Received from A.CARLSON  +852-2511-3033         13.10.95 04.22
  -> IBMMAIL.INTERNET      IBM MAIL EXCHANGE ADRESSE

Greetings from HK,

I saw my name mentioned, so I had to reply.

I deal with our joint venture partners on a daily basis, and spend a
lot of time in China.  We do in fact have two partners in China,
Shanghai Volkswagen where we make the Shanghai VW Santana (yes, the
good old Passat B2 or Quantum as it was known in the USA) and First
Auto Works Volkswagen where the Audi 100 C3 (4 and 5 cyl models) and
the Volkswagen A2 Jetta and Volkswagen "City Golf" (badge engineered
version of the SEAT Cordoba, current model) are made.

So far, year to date, deliveries are as follows:

MODEL               UNITS  (through Sept. 1995)

SVW Santana         107,096
FAW VW Jetta         14,604
FAW City Golf         4,023
FAW Audi 100C3       12,390
VW Passat import      6,337
Audi A6, A4 imports   1,727
Skoda Imports         3,532
VW GROUP TTL        149,709

Accurate competitive statistics are hard to gather, but this yields
around 51% market share of domestic production, around 53% when
official imports are counted (and I emphasize here the word
official).

The problem of "counterfeit Audis" is not analogous to counterfeit
Rolexes, Windows 95 or copies of Michael Jackson?s latest CD.
Rather, the problem relates to the porous nature of the Chinese
borders and recent government austerity measures designed to
"encourage" government officials, managers at state firms, urban and
rural political figures, and anyone else in a position to have a car
to stop driving imported cars.  The ultimate status symbols in China
are still foreign cars, with Mercedes Benz, Lexus and Cadillac
viewed with awe and admiration by the Chinese public.

If one is forced to step down to a local car, the only choice (by
far) is Audi. The Audi 100, sold in 1.8 4 cyl. and 2.2 5 cyl.
versions has been on the market for seven years now, and is a
ubiquitous feature of the Chinese street scene, usually black and
almost always chauffeur driven.

As people will always want something better, and beating the system
is part of human nature (especially for politicians worldwide, I
think) there is still a demand for something a "cut above". Hence,
the "counterfeit Audi".   These are cars sourced from outside China
and imported through Hong Kong in knock-down form.  Brokers buy cars
from the US, Germany, Saudi Arabia...wherever, and cut them down for
reassembly in China.  Parts are smuggled in (engines, doors, hoods,
trunks) and the chassis is cut and welded back together in China.

The imported Audis are desirable for their higher level of equipment,
 particularly automatic transmission and climate control, also V6
engines.  The end user gets his luxury import, yet its easier for

him to drive and license as it is an Audi, which is recognized as a
locally made car in keeping with government dictates.

Needless to say we take a dim view of this and are trying our best
to control it. Quality control is questionable, and we want to
protect the brand image of Audi in China and worldwide. Given the
free-wheeling nature of the developing market, this is hard to do.

Chrysler has a bit of a different problem with the Jeep.  The
Cherokee is made by Beijing Jeep, and as it is body on frame
construction it seems it was relatively easy for small firms in out
of the way locations to get hold of Cherokee body stampings and
assemble them on top of locally made frames, and power them with
locally made industrial engines. At 50 paces, you see one of these
things and swear it is the real thing. Closer inspection shows a
poor quality interior made of generic seats, dash and trimming
materials. But you have to hand it to these people for their
resourcefulness.

The point about roads and car market growth is well taken.
On the other hand, I have never seen major freeways go up faster in
any place in my life. Think of it: no zoning issues, no right of way
issues, no environmental impact studies. The government wants an
eight lane expressway from point a to point b; they simply do it.

Beijing and Shanghai have extensive road building projects and
infrastructure development going on right now the scale of which you
have to see to believe. In addition, mega-engineering companies are
building toll road freeways connecting all the major cities in
Southern China, with an eye to the open border to HK and Macao that
is coming.  Needless to say, VW Group sees nothing but opportunity
for our brands in China, for many years to come.

Eric Carlson
VW AP HK