You would think in a market where industry passenger-car sales surged 37% in the year’s first nine months, compared with year-ago, there would not be much bad news. But as the literal bull in the China shop, the world’s largest vehicle market cannot seem to get out of its own way.

While federal tax cuts and subsidies are spurring China’s auto makers to new sales and production records, the central government expects consumer demand to level off as incentives play out, leaving a glut of overcapacity by 2015, when manufacturing capability is forecast to hit 31 million units in what officials expect to be a 25 million-vehicle market.

Some stabilization was apparent in September, with passenger-vehicle deliveries making only a moderate gain on prior-year, rising 19% to 1.21 million units, according to the China Association of Automobile Manufacturers, albeit up from August’s 18.7% growth.

Government warnings of potential danger to the economy if production is allowed to continue unchecked is creating a furor among Chinese auto makers currently reaping the whirlwind, while world markets worry the overflow of vehicles will be dumped on them, sparking trade wars.

Yet, many industry analysts argue Beijing’s real concern should be the consolidation of the more than 100 domestic auto makers in the country. But that goal continues to be a moving target as ambitious local governments compete with one another for the strongest car markets.

Beijing long has called for the consolidation of four large national car companies and four smaller firms that would produce a total of 12 million vehicles annually. However, with sales in 2009 soaring 46% year-on-year to 13.6 million units and 17 million expected this year, according to the CAAM, none of the players see the need.

GM China Group, alone, broke the 200,000-unit monthly sales mark for the first time in September, rising 15% from year-ago to 208,353 vehicles. Deliveries climbed 19% in August and 22% in July, for a record 1.78 million units in the first nine months. Ford Motor China Ltd. says its joint-venture sales jumped 26% in September to 50,970 units, up 40% year-to-date to 419,073.

The good times have not been lost on the masses, as more rural workers arrive in the cities looking for higher-paying jobs to help them grab their piece of the booming economic pie.

But hope became demand, as China’s industrial cash-cow status was challenged in June by labor strikes demanding wage hikes. Toyota Motor Corp., Honda Motor Co. Ltd. and some of their Japanese suppliers in China especially were hard-hit.

A recent report by the nation’s official trade union cites government statistics showing China now has more than 150 million migrant workers, with 61.6% between 16 and 30 years of age. Another survey cited by Reuters reveals 55.9% of young workers plan to settle down in the city where they work.

For now, foreign auto makers don’t appear to be changing their strategies because of the strike risks. But observers say the long-term lessons are clear: China no longer is a bargain-basement market for placid workers, and the situation likely will get tougher, especially for foreign companies.

Most OEMs in China follow the country’s labor law that says companies need not consider social benefits, allowances and overtime pay when meeting legal minimum wages. But some firms pay beyond the standard.

“China is like every other country in the world,” says Tim Manganello, CEO of parts-supplier BorgWarner Inc., which recently added a multi-million dollar Shanghai technical center to its footprint in China. The country now accounts for 25% of Borg Warner’s global business.

As the Chinese economy becomes more and more mature, the gross domestic product, cost of living and standard of living will rise, he says at a June meeting in Detroit hosted by the U.S.-China Chamber of Commerce. “As they do, it drives an increase in income levels.”

But analysts argue there are other issues at work, as well, including the sought-after right to be represented by independent labor unions, rather than state-controlled unions set up by management. Whether the Communist Party will allow collective bargaining is becoming a political issue.

Foreign auto makers in China also face another conundrum: A 10-year plan the government is drafting for the electric-vehicle industry that will require them to share EV technology with their Chinese partners in exchange for market access.

Beijing has determined China will lead the world in “new-energy vehicles” and is putting its money where its mouth is with lucrative industry subsidies. The move has solicited charges of an unlevel playing field by members of the U.S. Congress, already incensed over the government’s deliberate efforts to undervalue its currency to boost exports.

But major auto makers with trusted, well-established joint ventures, such as Shanghai General Motors Co. Ltd., Changan Ford Mazda Automobile Co. and Dongfeng Nissan Passenger Vehicle Co., likely will find ways to meet such requirements without losing control of their intellectual property.

Reacting to a growing wave of complaints from foreigners about the business environment, China’s Vice President (and presidential heir-apparent) Xi Jinping is quoted as saying the government is taking “vigorous steps” to ensure China remains the world’s most-attractive destination for foreign investment.

Perhaps the one thing industry and government can agree on is the need for infrastructure to accommodate the coming crush of passenger vehicles expected to be sold annually in the next 10 years. The country already is known for some of the world’s longest traffic jams, such as the week-long gridlock in August that stretched 100 miles (62.5 km).

Indeed, the number of motor vehicles on China's roads has jumped to 199 million, including more than 85 million automobiles, the government’s official news agency Xinhua reports, citing a statement by the Ministry of Public Security.

And heavy congestion is bound to become worse as global auto makers, as well as domestic car companies, take advantage of a new wave of economic growth in China’s interior markets.

Despite China’s pressing problems, it’s safe to say foreign auto makers are there to stay, having reaped much of the industry’s growth over the last decade. Yet, they speed ahead at their own risk, according to a study by J.D Power, which projects Chinese brands will account for 45% of the country’s passenger-vehicle market by 2017.

bmcclellan@wardsauto.com