Volkswagen is to invest €540 million ($US650 million) in two new engine plants in China to help protect its market lead from rivals such as General Motors, executives told Reuters on Thursday.

The two plants, together with a €240 million factory already planned for Shanghai, would boost Volkswagen’s engine-making capacity to more than a million a year, the report noted.

One of the plants, to be built with partner Shanghai Automotive Industry Corp in China’s commercial heart, would have capacity to crank out 300,000 engines annually, executives told Reuters at the Beijing motor show, the other, with top Chinese vehicle maker First Automotive Works, would be in the north-eastern city of Dalian.

The report said no further details were forthcoming and executives would not specify timeframes.

Reuters noted that Volkswagen, the largest car maker in China but a mid-ranked player in global terms, is fighting to preserve its one-third share of China’s market so more locally made parts could be vital in an effort to stave off fast-closing rivals such as GM in the world’s fastest-growing major car market, one of the few industries in China dominated by foreign companies.

Locally made components circumvent high import tariffs, the report added, although industry executives complain that it can be tough finding quality suppliers, or getting parts shipped cheaply through a creaky, pricey domestic logistics system.

“This is absolutely necessary in order to survive in this country,” Folker Weissgerber, a board member overseeing China, told Reuters, adding: “GM is not only our competitor in the Chinese market, but also worldwide.”

According to the news agency, Volkswagen wants to spend some €5 billion to ramp up annual output to some 1.6 million vehicles over the next three years, part of a $13 billion spree planned by multinationals that could foment a future glut.

Executives did not say if the €540 million engine plant investment would comprise part of that overall spending figure, Reuters noted, adding that, on Wednesday, executives unveiled a plan to erect a two billion yuan ($240 million) plant in Shanghai that would focus on exporting cars – a first for a Western car maker in the country – with an initial capacity of 150,000 units yearly.

Volkswagen has already put a toe in China car export waters by shipping the first of a few hundred right hand drive Polo sedans (China is a LHD market) to Australia earlier this year.

Reuters said Volkswagen already has capacity to make about 750,000 engines a year – nearly its entire car production capacity in China, its second-largest market worldwide after Germany.

Now, the report added, it is eyeing transforming an already huge production base in China into an export machine and building more engines locally could help.

According to Reuters, China itself is intent on becoming a global car parts supplier along the lines of Mexico – it is already the top parts supplier in Asia, outstripping Thailand and India, and it is estimated it will ship more than $2 billion in component exports this year.

But its domestic parts industry is still considered inadequate at supplying high-performance and quality materials and components for a self-contained motor industry, the report said, which means a lot is imported, incurring high tariffs.

However, under World Trade Organisation commitments, tariffs on imported parts could slide to about 10% on average in 2006, closer to tax regimes in other countries and about half where they are now, Reuters added.

Once economies of scale are reached and more localisation occurs, car-making costs should approach levels in more developed countries, the report said.