(New throughout, adds details, quotes, background)
By Tony Munroe
GUANGZHOU, China, May 18 (Reuters) - Nissan Motor Co, unfazed by talk of overinvestment in China, on Tuesday opened a joint venture sedan plant -- part of a spending spree by auto makers gunning for a piece of the world's fastest growing major car market.
"Yes, overcapacity is a reality," said Miao Wei, chairman of Nissan's 50 percent-owned Dongfeng Motor Co tie-up. He said Dongfeng is adding capacity to meet demand, and called it "natural" that such a booming industry is attracting oversupply.
Miao said his company was having trouble meeting customer demand for the company's Nissan Bluebird and Sunny sedans, which is why he is unfazed by talk of overheating.
"For some companies it's undercapacity. For some companies it's overcapacity. These two situations exist at the same time."
Dongfeng also said it is in talks towards a China tie-up with France's Renault , which owns 44 percent of Nissan.
"We hope that in the future, we will have some kind of cooperation with Renault," Miao said.
China, which is trying to cool an economy growing at nearly 10 percent a year, is expected to unveil measures by next month that will clamp down on easy credit for new auto plants.
"The auto industry is developing so fast that we do need some guidelines urgently," said Miao, who expects Beijing's new policies to back big, profitable car makers, and to encourage a balance between foreign and domestically developed enterprises.
Car sales in China, which is dominated by joint ventures between local firms and overseas giants led by Volkswagen AG and General Motors , rose by 80 percent last year to over two million. Double-digit growth is expected this year.
In the first quarter, 567,000 cars were sold in China, a 44.5 percent increase that many watchers say is unsustainable.
ME TOO
Global car markers are loathe to be left behind in a market where, in Beijing alone, more than 1,000 new cars take to the streets each day.
Volkswagen, which last year grew deliveries in China by some 36 percent to 698,000 vehicles, early this month said it planned a new plant to help it reach yearly capacity of 1.6 million vehicles by 2008, and has earmarked roughly US$6 billion for China investment over the next five years.
Last week, number-two South Korean auto maker Kia Motors , an affiliate of Hyundai Motor Co , said it will invest $645 million to build a second joint venture plant in China, boosting its capacity in the country by 300,000 units to 430,000 a year by 2006.
Kia and Hyundai have said that, combined, they want to make a million units a year in China by 2010.
DaimlerChrysler AG recently won clearance to build a plant with Beijing Automotive Industry Corp that will turn out 25,000 C and E class Mercedes-Benz cars when it opens in 2006.
"Some of the manufacturers may not be able to use all the capacity that they've ramped up in the past one or two years," said DBS Vickers analyst Alice Hui.
Output expansions across the county have sparked worries about inventory buildups and margin-crushing price wars.
UBS analyst Henry Wu cited plant openings, price cuts and a profusion of new models as evidence of mounting overcapacity.
"From the second half of next year, things will get worse -- the overall profitability of the sector will drop," he said.
LATECOMER
Nissan, the world's most profitable car maker but a relative latecomer to China, on Tuesday opened its joint venture plant that will be able to make up to 150,000 sedans per year, starting with the Sunny, which costs about 180,000 yuan (US$21,740).
With another plant in Hubei province, Nissan's Dongfeng joint venture has capacity to make 220,000 cars a year, and plans to quadruple passenger car sales to 300,000 by 2007.
Several industry insiders point out that oversupply is not spread evenly across the sector, and many expect consolidation to claim smaller players and those without strong foreign partners.
"Japanese cars in general have a reputation for reliability, so I think Nissan, Toyota and Honda, these big Japanese three, should be able to perform very well," said Wu of UBS.
Indeed, Honda cars made at the Guangzhou Honda joint venture between the Japanese firm and Denway have proven so popular that buyers must join a waiting list. By contrast, Brilliance China Automotive has seen disappointing sales of its home-grown Zhonghua sedan, which faces heavy competition from better-known foreign nameplate cars.
(US$=8.28 yuan)