SHANGHAI – The Chinese government is giving a clear message to China’s auto makers that it wants the industry to become more efficient and cars to be more environmentally friendly.

Beijing demonstrated its ability to accomplish this goal by using the power of the market to force car manufacturers to compete on price, rather than relying on consumer subsidies, by scrapping a national vehicle-replacement program in January.

Officials also reversed a tax break for the purchase of low-emissions vehicles with engines smaller than 1.6L by restoring the tax to 10% from 5% set in 2009.

However, consumers buying energy-efficient cars still can enjoy a subsidy of RMB3,000 ($456) introduced in July 2010 – a clear signal to the public and car companies alike that green pays.

The major auto makers are listening. “We will continue to bring to the Chinese market quality, safe and fuel-efficient vehicles from our global platforms while developing cars specifically for the Chinese consumers,” a Ford China spokeswoman tells Ward’s.

The auto maker says it sold 582,000 passenger vehicles in China in 2010, up 40% from recessionary 2009, with the Focus, Fiesta and Transit van leading the way.

Ford has a strong commitment to the Chinese market, where a large part of our global growth in the future will come from,” the spokeswoman says.

Ford makes vehicles in China through a joint venture with Chongqing Changan and Mazda. The U.S. auto maker also holds 30% of Jiangling, which builds the Transit van.

Ford also is looking at alternative-energy vehicles as a potential opportunity for sales here, but has not yet developed specific production plans, the spokeswoman says.

Some major players already are a step ahead. In January, Volkswagen China President Karl-Thomas Neumann told the Chinese media the German auto maker plans to invest E10.6 billion ($14.8 billion) in the 2011-2015 timeframe for new-car development, including electric vehicles, and expanding production capacity.

Shanghai General Motors says a new version of the Buick LaCrosse powered by a mild-hybrid engine system will hit assembly lines in China by the end of this year.

Domestic car companies are not standing aside. Geely, the Hanghzou-based privately owned auto maker that acquired Volvo in 2010, is in talks with Shenzhen-based electronic components firm Foxconn International about supplying Geely’s electric vehicles.

“We are talking about cooperation on new-energy vehicles, specifically electric cars," Geely spokesman Victor Young says, noting an agreement has yet to be reached. He also emphasises the importance of low-emission cars in Geely’s strategy.

“Geely (this year) plans to launch more than 10 models priced from RMB50,000-RMB100,000 ($7,600-$15,200), all of which are “competitive in terms of function and energy efficiency,” Young says.

Geely reportedly has said it could leverage Volvo’s U.S. dealer network to sell its own vehicles.

Sweden-based Volvo, which now serves as Geely’s premium brand, has a low-emissions component to its Chinese market strategy. CEO Stefan Jacoby recently announced a 5-year investment plan, including the establishment of a Shanghai-based research center that will include alternative-energy cars.

Energy efficiency is the overall focus of China’s auto industry this year, says Jason Huang, an analyst at U.S.-based market-research firm Frost & Sullivan.

“(China’s) new policy surely encourages manufacturers to launch more energy-saving cars,” he says, adding it also is an opportunity for the domestic car companies to seek further growth and enhance their core competitiveness. “It is the only way for Chinese auto makers to compete in the global market.”

Shenzhen-based BYD displayed two electric cars this year – the e6 and S6DM – at the annual North American International Auto Show in Detroit. Backed by Germany’s Daimler, BYD says it will launch the two models in the U.S. in 2012.

An aggressive export strategy is important, given Chinese production could fall while plants are being modernized and government agencies try to staunch the country’s runaway road congestion, says Xu Jinquan, general manager of Shanghai-based research firm Timer-Auto Consulting.

Beijing’s city administration, for example, now only allows the release of 20,000 license plates per month. Previously, there was no limit, which helped make the city home to more than 4.8 million vehicles last year.

“People in our industry say an optimistic estimate for the number of vehicles sold in Beijing this year is 500,000,” Xu says, compared with 891,000 units in 2010.

The country’s fast-growing vehicle market in recent years has made China a nation of traffic jams, even in smaller cities such as Hefei and Handan, Xu says. Some 18 million cars were sold in China in 2010, up 32.3% from prior-year, says the Beijing-based China Association of Automobile Manufacturers.

“Being the world’s largest auto market is not only about auto sales, but also about appropriate urban planning, policies and infrastructure,” Xu says. “I think China is not ready yet.”