Volkswagen do Brasil is ending its agreement to supply China with Gol CKD kits.

The car maker told just-auto the decision was taken "by mutual consent" between the Brazilian and Chinese units as a result of the continuing rise of the value of the Brazilian real against the US dollar.

Volkswagen do Brasil needed to increase the price of the Gol kits to compensate for the strengthening currency and this would have made the model uncompetitive in China.

The last kit shipments will be made by the end of this year and Volkswagen will stop Chinese assembly next year.

The original $US500 million agreement between Volkswagen do Brasil and Shanghai Volkswagen was based on the export of 50,000 units a year over five years. Kit shipments began in 2003.

In 2005, only about 25,000 units will go to China. Volkswagen do Brasil said it has shipped about half the volume originally planned.

An agreement with Iranian Bamco, a subsidiary of Kerman Automotive Industries, which also buys the Brazilian-made Gol kits is also causing concern.

Volkswagen do Brasil has already notified Bamco that it will have to increase the price of the kits but, for now, no change has been made to the agreement and shipments to Iran continue.

VW expects the strength of the Brazilian real to reduce its export volume in the next year.

In 2005, the company plans to ship about 260,000 vehicles to foreign markets, but projects 2006 exports at 230,000 units.

The strong currency is also affecting VW's rivals in Brazil. General Motors, Ford and Fiat have also reduced estimated export volume for next year.

The real is trading at its strongest levels since 2001.

Rogério Louro

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