Volkswagen seeks higher margins with China-only luxury sedan

Going upmarket would see the German auto maker trespass into a segment dominated by Audi, BMW and Daimler AG's Mercedes-Benz, which are in turn seeking growth by producing more affordable models closer to Volkswagen's line-up.

"Selling luxury cars makes for fatter profit. Volkswagen believes this segment will continue to grow rapidly," said one of the people, who is not authorized to talk to the media so declined to be identified.

"Premium models under the Volkswagen brand will be especially attractive to those who want a superior car but don't want to catch too much attention," said the person, dismissing the long-term impact of the crackdown.

China's premium car market could surpass that of the United States to become the world's biggest as early as 2016 thanks to increasing affluence, forecast consultancy McKinsey & Co.

The Volkswagen group operates upper-class name plates Audi, Bentley, Porsche and Lamborghini independently to its Volkswagen brand. The group commands over one-fifth of China's passenger vehicle market where it dominates in mid-tier compact sedans.

Code name 511

Volkswagen's new premium car is code-named 511, the people said. It was designed in Europe but will be the brand's first large "C-class" sedan manufactured in China - by Shanghai Volkswagen, a joint venture with China's SAIC Motor Corp Ltd.

A spokeswoman at Volkswagen in China confirmed the existence of a plan for a C-class car but declined to provide details. SAIC Motor declined to comment.

Shanghai Volkswagen produces the Santana, China's No 2-selling compact sedan this year, according to researcher LMC Automotive. But the German auto maker's joint venture with China FAW Group Corp, FAW-Volkswagen Automobile, is more profitable because it builds Audi cars, one of the people said.

Volkswagen earned 1.01 billion euros ($1.29 billion) in operating profit in January-June selling 2.3 million VW passenger vehicles globally. By comparison, Audi earned 2.67 billion euros from 750,000 cars.

Volkswagen's entry into China's high-end car market will begin toward the end of 2015. It has not determined a price for its luxury car but has set an annual sales target of 50,000 vehicles, the person said.

To elevate its brand image, Shanghai Volkswagen will set up 100 upscale dealerships across China over the next three years, where the decor and hospitality will give prospective buyers a different feel of a familiar brand, the second person said.

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