China now churns out more new cars than the United States and Japan combined, but despite the industry’s huge capacity and potential, it faces immediate and longer term headwinds that could force many manufacturers to consolidate.

Last year, China’s automotive industry produced almost 24 million vehicles – more than double its output in 2009, when the country became the world’s largest auto manufacturer following the global financial crisis.

亚博足彩appThere should be a big domestic market for those cars. China currently has just over 100 vehicles for every 1000 people, lagging well behind the global average of 200 and miles off Japan, 600, and the US, almost 800. But anecdotal evidence says China’s new car sales are softening.

亚博足彩appAccording to Goldman Sachs analysts, the volatile atmosphere caused by plunging stock markets and currency fluctuation is a problem, especially when combined with underwhelming economic growth.

“With higher uncertainty in the economy, firms and individuals tend to postpone irreversible investments and big-ticket purchases and wait for a better read on the future,” Goldman analysts wrote this week.

亚博足彩appThat’s not to say brighter economic times will provide a salve for China’s carmakers. Statistics show domestic-branded vehicles were only able to grab 41.5 per cent of market share in the first half of this year.

Local brands SAIC and Chang’an were ranked fourth and fifth in the country by sales revenue, outdone by Volkswagen, Hyundai-Kia and General Motors. Japanese brands also figured in a diverse top 10 featuring just two local representatives. (Click on chart above to enlarge)

“China’s motor vehicle buyers are quite brand conscious – with a preference towards multinational brands, reflecting in part the perception of higher quality,” said National Australia Bank (NAB) in a report issued last week.

亚博足彩appNAB analysts said quality perceptions also hamper sales in mature overseas markets. In Australia, for example, safety concerns saw Chinese makes dwindle to just 0.21 per cent of new vehicles sold in the first half.

亚博足彩app“While it takes some time (often decades) to meet the acceptable quality standards of mature markets, it can take even longer to overcome … the ‘perception gap’ – the difference between actual quality and the perception that consumers have of the product,” the report said.

With production capacity projected to exceed domestic demand by 11 million units this year, carmakers are struggling against unhelpful regulations including urban car registration restrictions designed to combat pollution and traffic congestion.

亚博足彩appThe industry is also a victim of its own fragmentation. According to NAB, China had more than 170 auto manufacturers by 2012 as individual regions staked their claims. Not only is this brand-diluting, wasted capacity is forecast to exceed 30 per cent this year – beyond industry break-even level.

“Consolidation, both in terms of capacity and the number of producers, is likely to be necessary to improve the profitability of the industry as a whole, before Chinese producers can realistically compete in global markets over the long term,” NAB said.