China’s vehicle market continues to accelerate at a breathless pace, with the China Machinery Industry Federation predicting both sales and production to hit a record 9 million units this year.

Zhang Xiaoyu, federation vice president, tells the Xinhua official news service that the new forecast, up from the previous 8.5 million units, will see China reach its targets for the 2006-2010 period three years in advance.

National Development and Reform Commission Vice Minister Zhang Guobao reportedly says China’s auto industry has been developing vigorously to withstand challenges posed by the country’s entry into the World Trade Organization.

Zhang tells a recent international forum the industry’s success can be attributed to three factors: a sound economic environment, solid industrial foundation and sharpened competitive edge in the global market for improved product quality.

However, he warns, the auto industry also has three problems: overcapacity, an underdeveloped auto-parts industry and unsatisfactory aftermarket service.

Chinese auto makers have ambitions to export cars to major overseas markets, as well. But so far, it’s been a tough sell in Europe due to major quality issues. Increasingly, the domestics are looking to launch their products first in the emerging markets of Eastern and Central Europe, most notably Russia, and in South America before turning to North America.

However, as regulatory barriers strengthen across the global auto industry, it will become more difficult for China to meet stricter fuel-economy, vehicle-emissions and safety standards.

Some analysts predict the government will clamp down on its home market after the 2008 Olympic Games in Beijing have ended, while others say the move will be more gradual.

But the heat is on. As the world’s second heaviest emitter of greenhouse gases from fossil fuels behind the U.S., China already is feeling international pressure.

“Climate change affects sustainable development and the well-being of all humanity,” China’s President Hu Jintao is quoted by Reuters as saying during the Asia/Pacific leaders summit in Australia this summer. “The Chinese government attaches great importance to the problem of climate change.”

While a good chunk of China’s harmful emissions comes from burning coal, vehicles contribute their fair share, and there is some movement in tackling the problem.

The government last year announced plans to allocate $200 billion for biofuels production over the next four years as part of its clean-vehicle project.

And this week, General Motors Corp. announced plans to set up a $250 million alternative-fuels research center in Shanghai.

“We believe China has the potential to become a leader in the adoption of alternative propulsion systems,” GM CEO Rick Wagoner says in media reports. Construction of the first phase of “The General Motors Center for Advanced Science and Research” should be completed late next year.

While China’s clean-vehicle research currently is being driven by hybrids and biofuels, there also is growing interest in compressed natural gas, which some experts say has more potential as an alternative fuel due to its environmentally friendly characteristic and the country’s abundance of gas reserves.

Against this backdrop, fierce competition within China’s domestic market intensified in the year’s second half, with vehicle price cuts pinching industry profits. Geely Automobile Co. Ltd. reported its first-half net income slid 32% in part due to the intense competition.

Industry observers say international auto makers have an advantage in that they can balance cutting vehicle prices in China with profits made elsewhere. And while state-owned car companies count on being propped up by local Chinese governments, which see the industry critical to their local economy, at some point these domestics will need to grow.

As China’s turbulent automotive industry rolls forward at warp speed, there are significant trends worth noting.

Tomoo Marukawa, a University of Tokyo professor who has been a close observer of the industry for the last 15 years and a frequent visitor to the Chinese mainland, says an increasing number of players now share the domestic market.

Indeed, latecomers such as Geely, Chery Automobile Co. Ltd., Guangzhou Toyota Automotive Co. Ltd. and Changan Auto Co. Ltd. are the fastest-growing auto makers. Chery, in particular, has shown remarkable success, he says, with production up 45% in the year’s first half.

Not only has Chery made inroads in the export markets, but it also has a deal with Chrysler LLC to build Dodge-branded cars for export to markets including the U.S.

As China’s fourth-largest passenger-car manufacturer, Chery quickly is closing the gap with the top three producers in the segment that include FAW-Volkswagen Automotive Co. Ltd., Shanghai Volkswagen Automobile Co. Ltd. and Shanghai General Motors Automobile Co. Ltd.

There currently is no government decree requiring Chinese partners in foreign joint ventures to establish their own national brands. Although China’s 11th 5-year plan drafted for the auto industry includes an article requiring such development of indigenous brands, it was not officially promulgated in early 2006 as originally scheduled.

“This delay means there is strong opposition from foreign partners to the proposed national-brand policy, and it is possible the draft will not be approved,” Marukawa says.

Nevertheless, breakout companies, such as Shanghai Automotive Industry Corp., Brilliance Automotive Ltd. and Changfeng Group Co. Ltd., are looking to establish independent brands overseas, although so far they have seen little success.

While domestics partnered with foreign car companies have an advantage in tapping into new technologies, they too have seen little success on their own.

“Foreign partners may well be relieved by the poor performance, since it shows their Chinese partners are not competent enough to compete with established brands,” Marukawa says.

“This lack of competitiveness may not improve much, even with strong government support, because it is not easy to persuade Chinese consumers to buy national brands.”

But initial failure has not discouraged a number of Chinese car companies, which are turning to outside expertise in design, engineering, production and marketing. All of the major independents rely on help from outsiders.

“Cooperation with foreign companies is the reason for the quick catching-up of Chinese auto makers, and they will continue to need help from outside to keep pace with new developments in automotive technology,” Marukawa says.

At the same time, massive, well publicized recalls of Chinese-made goods exported to Western nations this year are causing concern among China’s auto executives.

“I’m pleased we’re not launching cars this month,” Bill Pollack, chairman-Chinese America Cooperative Automotive Inc., tells Ward’s in August when asked about the potential impact the recalls could have on Chinese vehicles overseas.

Pollack believes that unlike toys, which mostly have borne the brunt of the recalls, vehicles are held to a higher standard for safety. “There’s a great deal of government regulation, both in China and the U.S.,” he says.

But China’s expectation of high-volume vehicle exports will not be realized anytime soon, says Global Insight Inc. analyst Ashvin Chotai.

Relatively thin capacity by independent OEMs; an open domestic market where they must compete with multinationals; and their status as technology followers, not innovators; will slow most Chinese auto makers’ overseas growth.

– with Mack Chrysler and Christie Schweinsberg

bmcclellan@wardsauto.com