China's car industry, long dominated by big Western names, may be moving back into the fast lane, but the winners are likely to be the upstart Japanese, Korean and local firms offering smaller, cheaper cars.
After a brutal year of slowing growth, auto makers clocked their fastest pace of sales growth in at least a year in June. General Motors and Toyota Motor have raised their full-year targets and industry executives predict a second-half rebound.
Analysts warn, though, that saturation among wealthier Chinese will skew growth toward smaller, low-budget cars, helping Asian firms such as Hyundai Motor and domestic players such as FAW Xiali.
Amid signs of a longheralded shakeup in the world's third- largest vehicle market, makers with rock-bottom price tags are grabbing market share from the pricier Western models.
"If you look at market momentum, it's the Japanese and Koreans who are taking share," said Michael Dunne at Automotive Resources Asia.
" Their real concern is less VW, and more the Japanese and Koreans."
Only a year ago, most car makers couldn't build fast enough to satisfy rampaging demand.
Now, the market GM and Volkswagen consider their second-largest is far tougher.
Once a profit machine, China has become one of the industry's most intense battlefields, prompting firms to slash prices and launch models to appeal to a growing class of nouveau riche.
With many of the wealthiest already behind the wheel, manufacturers are having to target a less brand-conscious, more price-sensitive group of buyers, analysts said.
"Those that had the means to buy a car easily have already done so.
"Now, you're looking at buyers who have the same desire - but without the same spending power," said an industry executive based in Shanghai.
Car makers catering to the sub-50,000 yuan (£3,452) class stand to benefit the most, said Yale Zhang at consultancy CSM, referring to locals such as Hong Kong-listed Geely Automobile. The move toward cheaper low-end cars could come at the expense of marques like Volkswagen and Honda that do not yet offer a car in that price range.
Automotive expects the number of cars sold for under $12,000 (£6.857)- including GM's Sail and Spark sedans --to account for 45 per cent of the market this year, up sharply from 24 per cent in 2003. In India, that figure is closer to 75 per cent.
A sales resurgence may not translate into fatter profits as car makers are expected to keep slashing prices in an intensely competitive environment to entice buyers back into showrooms even as Beijing cracks down on easy auto loans.
With foreign players from Ford Motor to Nissan Motor spending some $15 billion (£8.57 billion) to triple capacity to over seven million cars by 2008, there's still a risk of an impending glut that would hit all market participants alike.
"The numbers in the second half will look good on an annual basis, since they're coming off a lower base," said DSM's Zhang. " The market remains very, very competitive."
Car sales in China jumped nearly half in June, putting them up 10.6 per cent in the first six months to 1.843 million units, the China Association of Automobile Manufacturers said this week.
In comparison, sales of cars and light trucks in the United States, the world's biggest market, rose 2.6 per cent in January-June to more than 8.5 million units.
Analysts said the June spike might reflect manufacturers forcing dealers to take product before a third-quarter lull --when plants are usually brought down for weeks-long maintenance.
CSM's Zhang said the June rise prompted many players to readjust their 2005 China expectations. Toyota recently lifted its full-year target by 8.6 per cent, joining GM, Hyundai and PSA Peugeot Citroen in boosting forecasts.
"We're confident the second half of the year will be a very good one in terms of industry growth, and certainly from our own performance," said GM China chief Kevin Wale.
Guotai Junan Securities analyst Zhang Xin said Volkswagen's market share could slip to 15 per cent soon from a quarter at the end of last year.
Other analysts reckon the German firm might post a loss in China this year.
In fact, as many as half of the country's car makers are thought to be losing money, according to some estimates.
To improve margins, many are changing their game plans for China, shifting more production to the mainland and increasing local sourcing. Analysts said auto makers were bracing to ride out pain in coming years.
"The game is shifting from one of taking short-term profits to putting yourself in a position to sustain yourself for the long term," Dunne said.
"That means, of course, market share, but it also means being able to bring home some money."