Despite meteoric growth, there may be a glut of cars in China by 2015

The world's most populous nation has seen rapid growth in the car industry, but there are challenges ahead for manufacturers.

Few people know better than Noh Jae-man, Hyundai's chief executive in China, how rapid the growth of the car industry has been in the world's most populous nation.

In 2002, when Mr Noh took up his position, the prediction from the official state information centre was that by last year, total car sales in China would be about 4.9 million vehicles a year.

In fact, 11.1 million passenger vehicles were sold last year, making China the world's largest car market for the second year in succession.

This is just the start. With vast growth in demand expected from China's central and western regions, by 2020 annual car sales in the country are predicted to be 30 million.

Despite this unprecedented growth, there are many challenges.

Not least among them are rapid increases in wages. Last year the operations of several major car makers in China, including Honda and Toyota, were affected by strikes.

"The average wage in manufacturing has increased 2.7 times since 2002," said Mr Noh, adding they were expected to double again by 2015.

People need to "let go of the perception that the Chinese market is a low production base", he said, adding that the average profit margin is likely to decrease from 4.9 per cent last year to 4.6 per cent this year.

"Due to the larger wages and strengthened safety regulations, companies might be faced with decreasing profits in future," he said.

"Demands from workers will only increase, and it's important to keep lines of communication to prevent the situation from boiling over."

Also, competition is expected to intensify. There are about 260 models now on sale in China, and 220 new ones are set to be launched there over the next five years.

"If this trend continues, the total number of models competing in the Chinese market will exceed that in the US, which currently has 290 models," said Mr Noh.

The leading brand in China is Volkswagen-Audi, with a 16.8 per cent market share last year, down from 39.8 per cent in 2002. General Motors is second with 10 per cent, while the Korean-based Hyundai and its sister brand, Kia, secured 9.3 per cent last year, more than double the figure of 2002.

Some Chinese manufacturers, which together have about 31 per cent of the market, are thought to be suffering from oversupply, despite the huge growth in sales. With many new factories being built, these problems are likely to become acute over the coming decade.

"It's estimated that by 2015, total production capacity will reach 25 million units. On the other hand, demand is estimated to be around 19.6 million units, which will create an oversupply of 5 to 6 million cars," said Mr Noh.

"This will intensify competition among brands and create high risks that may bring structural changes."

So as car sales in China continue to rocket, expect mergers and acquisitions. Another strategy to deflect the impact of overcapacity will be increasing car exports.

Last year the country exported 540,000 vehicles, 260,000 of them passenger vehicles, with commercial vehicles accounting for the remaining 280,000.

"It's estimated this number will increase in future," said Mr Noh.

His company, however, will not be contributing, as none of Hyundai's cars produced in China are sent overseas.

Unlike some of the local producers, many of the joint ventures between foreign car makers and local partners are suffering from undercapacity, so it is not surprising these global carmakers are keeping local production for the domestic market.

Hyundai has two plants, each with a capacity of 300,000 vehicles a year, and is building another with 400,000 capacity, due to open next year.

"Plans after that are not decided as we have to watch how demand in the market plays out," says Mr Noh.

Given the sky-high growth in sales, however, it would be surprising if Hyundai and other international car makers in China did not announce plans for more factories. In a market expected to account for 30 per cent of global car sales in 2020, no one wants to be left behind.