Volkswagen and its Chinese partners said on Monday they will nearly double their capacity in the world’s fastest-growing car market to 1.36 million vehicles by 2007, Reuters reported.

Analysts told the news agency that the move is meant to help Europe’s largest car maker stave off competition and protect its now-dominant position in its second-largest market, but could tip the Chinese market closer to overcapacity and a margin-eroding glut.

“This is a live or die situation for Volkswagen. They have to continue pouring money in to protect market share, even if it eventually leads to overcapacity,” Hong Kong-based Deutsche Securities Asia auto analyst Lawrence Ang told Reuters.

The news agency said the expansion, along with similar plans by VW’s international rivals, could further fuel a price war as Volkswagen’s planned capacity alone will be more than a third larger than the entire existing Chinese market and would make up nearly a third of Volkswagen’s global output.

Reuters noted that foreign car makers and their Chinese partners have announced capacity increases that would lift production to 2.28 million by 2007 from 1.26 million in 2003.

“It’s inevitable. You cannot avoid a price war when there are so many foreign and domestic brands fighting for a piece of the pie,” said a Shanghai-based senior associate at consultancy Automotive Resources Asia Ltd, Angela Gu, told Reuters.

According to the report, Volkswagen and partner First Automotive Works will invest one billion euros ($US1.15 billion) to build a new plant in the north-eastern city of Changchun, chasing a car market that saw sales break the one-million mark for the first time last year.

The company had also begun expanding an existing facility on the same site, Wang Miye, a spokesman for the Sino-German joint venture, FAW-Volkswagen Automotive Co Ltd, told Reuters.

The new plant will have a capacity of 330,000 vehicles when completed by 2007, while the expansion would boost capacity at its current plant to 330,000 from 300,000, Reuters said.

“Both the new plant and the expansion of the current one will more than double our capacity in Changchun,” Miye told Reuters.

At the same time, another spokesman told Reuters, Volkswagen’s venture in China’s financial hub, Shanghai Volkswagen Automotive Co Ltd, will raise capacity by 75% to 700,000 units by 2007.

“Our target is 700,000 vehicles by 2007, but we’re not sure if the increase will come through an expansion of current facilities or by building a new plant,” the spokesman reportedly said.

Volkswagen, which is battling falling sales in its home European markets, has invested three billion euros in China so far and is by far the largest car maker in the country but others are nipping at its heels, Reuters said, noting that a number of its rivals are planning or executing dramatic expansions in the domestic market, chasing growth of 15-30% this year and a similar pace over later years.

According to the news agency, General Motors is investing two billion yuan ($240 million) to double capacity at an existing five-year-old plant in Shanghai, raising maximum output by an additional 100,000 cars a year while Nissan Motor said in June that a $2 billion venture with China’s Dongfeng Motor Corp would begin operations in July, producing 220,000 cars and 330,000 commercial vehicles by 2006.

Reuters added that, in the much longer term, the rush by foreign car makers to join an expansion race could even spur exports from low-cost China to high-cost locations in Europe and the United States, exacerbating oversupply and pressuring prices there.

“Several auto makers already have an export strategy in mind. There are a lot of issues to be resolved, like unions, but I think it’s only a matter of time before they do it,” Gu told Reuters.

Reuters said China’s car market is only the size of Spain’s but its development is attention-grabbing. According to the report, Volkswagen said sales in China leapt 62% year on year in the first five months of 2003 and VW itself, which controls about 40% of the market, sold 270,495 cars from its two Chinese manufacturing ventures.

VW said in February it aimed to sell 600,000 cars in the country this year — a 17% increase from 2002, Reuters noted.