Discuss as:

Automakers eager to open up the 'other' China

Odd Andersen / AFP - Getty Images

Volkswagen Chairman Martin Winterkorn, left, German Chancellor Angela Merkel, middle and China's Prime Minister Wen Jiabao. Earlier this year, VW signed a contract for a new plant in Xinjiang.

Despite an unexpected slowdown in sales earlier this year, the Chinese auto market is expected to hit an industry-record 20 million vehicles this year – prompting manufacturers to announce billions of dollars in new factory investments designed to keep up with booming demand.

Ford will invest nearly $1 billion to double its capacity in the Chinese market. Nissan needs to support plans that would boost its own sales from 1.2 million units this year to 2 million by mid-decade. And then there’s Volkswagen, second only to General Motors as a Chinese powerhouse. VW will spend $225 million on a new factory in Urumqi.

What’s unusual about the VW investment is that it is targeting the western province of Xinjiang, far from the established Chinese automotive manufacturing center, which stretches along the nation’s Pacific coast. That includes cities such as Shanghai and Beijing that have also provided the bulk of demand to support the decade-long Chinese automotive boom.

Xinjiang, by contrast, is a provincial backwater, a land of sparse, high mountain deserts that has barely felt the impact of China’s economic revolution. So why would Volkswagen want to build a plant there?

While the German maker won’t confirm it, there was likely at least some gentle pressure from the Chinese government, which is looking to spread the wealth, so to speak, bringing economic improvement to the rest of the country. 

And automotive industry leaders generally agree with that strategy as a way to further expand their market. That’s especially true for makers, like Ford, who were slow to target China. 

The second largest of Detroit’s makers, Ford is little more than an also-ran in China with sales of a little more than 600,000 vehicles last year – compared to nearly 2.3 million for GM. Ford’s own new plant in Hangzhou is a bit off the beaten path.  And the maker is betting that much of the demand will come from first-time buyers “in the new markets in Western China,” said Joe Hinrichs, head of Ford’s Asia, Pacific and Africa operations during an interview at the Beijing Motor Show.

The disparity between the booming Pacific Coast and the rest of China is enormous, especially when it comes to the automotive market, said Yale Zhang, managing director of the consulting firm Automotive Foresight (Shanghai).

In so-called Tier I cities, such as Shanghai and Beijing, car ownership is now approaching levels seen in Japan, if not the United States – anywhere from 250 to 500 cars for every 1,000 residents. That boom is creating chaos on the streets, leading some cities to attempt to curb car purchases.  Beijing last year enacted a registration lottery. Only those who win one can buy a car.

“Beijing’s traffic, cannot be sustained at the current level” of growth, Zhang explained.

In cities like Urumqi, however, there’s not much more traffic than a decade ago, when the Chinese automotive industry first got going. But building up a market won’t be easy, the analyst cautioned, noting that income is also substantially lower when you move off the fertile Pacific Coast.

So manufacturers targeting central and western China are focusing on smaller and markedly less expensive vehicles than those sold in the east. GM and its Chinese partners, Shanghai-based SAIC and Liuzhou’s Wuling, have created an entirely new brand, dubbed Baojun – or “Treasured Horse” – specifically to go after the lower-tier cities.

The new brand -- and similar new competitors, such as the Nissan/Dongfeng joint venture called Venucia -- is largely focused on products in the $5,000 to $10,000 range. That’s apparently connecting with wannabe Chinese motorists. Within its first few months on the market, Baojun already had a 2 percent share of its market segment. So far this year that has more than quadrupled.

While so-called Tier III, IV and V cities will likely be slower to go mobile they still hold out significant promise according to Kevin Wales, head of GM’s Chinese operations. By various estimates, he said, there are somewhere between 200 and 300 cities in China with populations of more than 1 million. Even a modest increase in car sales in those new regions would help maintain the Chinese automotive boom.

While the days of 20, 40, even 60 percent annual growth are likely over, Automotive Forecast’s Zhang still anticipates the overall market will increase between 6 percent and 12 percent in 2012 – figures most analysts and industry planners agree with. With demand clearly on the rise after the first-quarter slowdown, Chinese motorists are all but certain to snap up at least 20 million vehicles this year.

Nissan CEO Carlos Ghosn is among the many experts forecasting demand will reach at least 30 million by decade's end. But that will require some significant changes in the Chinese economy and its automotive market – with the fruits of the last decade spreading deeper and deeper into the countryside.

More from msnbc.com autos:

Follow msnbc.com business on Twitter and Facebook