Volkswagen will start building light commercial vehicles, engines and components in China to counter falling market share in its most important foreign market, the carmaker said on Wednesday.

According to Reuters, Volkswagen has previously said it would spend €5.3 billion ($US6.6 billion) to double production in the country and its plans detailed on Wednesday are intended to help boost sales in China, where it has struggled to maintain dominance in the face of tough competition from rivals such as General Motors.

The Wolfsburg-based company reportedly said it sold 276,400 vehicles in the first five months of this year, corresponding to a market share of 24.8%. VW has repeatedly said it aims to hold on to last year’s market share of roughly 30%.

Reuters said VW plans to manufacture the Multivan and Caravelle light trucks in China and also aims to manufacture four-cylinder motors starting in 2006 – both projects are joint ventures with its Chinese partner, FAW.

“We plan to enter the light commercial vehicle market in China,” a spokesman told the news agency – but he could not provide details on when production of Multivans and Caravelles is to start or how many the company aims to sell.

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The company also founded Volkswagen FAW Platform to build chassis components for the Caddy, Bora [current US market Jetta] and Touran models starting towards the end of 2005, with an investment that will total €149.5 million, Reuters noted.

The report said the German business daily Handelsblatt reported also on Wednesday that VW’s unit sales in China declined by 35% in June, reducing its market share to 16%.

“China was a positive issue in VW’s equity story, but now it might become even a negative issue,” Merck Finck analyst Robert Heberger wrote in a note to clients on Wednesday, Reuters said.

In an indication of some of the problems in China, Volkswagen chief executive Bernd Pischetsrieder reportedly said last month that the company’s move under predecessor Ferdinand Piech to launch its new Polo in China was the wrong decision because the model was too small for the market.

Analysts have criticised other models as well, warning that VW must avoid applying in China the industry practice of selling models in developing countries that are already unpopular in the affluent West, in order to extend their lifecycle, Reuters added.

“China isn’t a third-world country. Consumers are well informed and very demanding,” BayernLB analyst Oliver Girzick told Reuters, adding: “Volkswagen has underestimated them a little bit, and now they need to launch new, more attractive models.”

Girzick reportedly said, however, the company’s competitive advantage over its rivals remained intact, despite falling car sales and a slipping market share.

“They benefit from excellent relations with the local government, and VW doesn’t have to inject money from abroad as GM or others currently do,” he told the news agency, adding that most of the €5.3 billion investment would be financed through the joint venture’s own cash flow.

Volkswagen said its Chinese joint ventures contributed €479 million to earnings in 2003, Reuters added.