Why is Abu Dhabi buying into Volkswagen? (page 3 of 3)

'It is a far better car than the last Golf,' argues VW's Gaube. 'It is better in various ways. There is no price problem. Even at the entry level, the new version of the Golf is picking up.' Outside Europe, the deal with Abu Dhabi has special significance for VW's plans for the Middle East.

The company currently generates less than one percent of its sales in the Middle East region, putting it way behind other major carmakers. The company says that this was not part of any strategic plan, and that its resources were simply stretched too thin to cover this market.

'We have been focusing on China in a major way, and we could not have been present in all the markets around the world at the same time,' explains Gaube. 'There are Johnnies come lately in various markets. In the Middle East, unfortunately, VW is one of them.'

Despite owning top brands in the luxury segment, such as Bentley, VW has failed to tap the immense potential of the Middle East market, which generates about 10 percent of global sales in this high-profit segment.

'Until 2000, there were never enough shipments marked for the region - for VW, it was too insignificant to invest in. Things have not improved greatly since then,' says a local car dealer in Dubai. 'Volkswagen is a bit player in the Middle East automobile landscape: you can easily contrast this with the kind of clout that rival brands like Mercedes and BMW have here.'

Volkswagen's Gaube, though, insists that all this is now set to change. 'The Middle East is becoming much more important for us than ever before, and this deal will give us a foothold in the region. First, we will have the chance to offer financial services in the area and, second, with new partners, we will have a chance to access large markets in the region.'

The memorandum of understanding signed in April by Abu Dhabi and VW states that LeasePlan and Volkswagen Financial Services will set up a subsidiary in Abu Dhabi, and then spread the services across the entire region. Another important aspect of the memorandum is that VW has agreed to conduct a feasibility study on assembling trucks in the region.

The facility, which could be located in Abu Dhabi, will be the first such VW plant in the Middle East. VW has also agreed to conduct another feasibility study to see whether the region's suppliers could set up facilities to supply VW with various automobile parts made from polymers, rubber and aluminum.

With these initiatives, VW's presence in the region - and the region's importance to the company - will definitely undergo a sea change. Indeed, the presence of a silent but powerful shareholder like Abu Dhabi will ensure that Volkswagen's regional future is bright.

For now, though, the company's worldwide outlook remains less certain. And while VW appears prepared to sell a 10 per cent stake to Abu Dhabi, no deal is likely to take place before September. For both sides, it promises to be a long, hot summer.