The Chinese automotive industry achieved remarkable growth in 2009 and the momentum hasn't slowed as we enter 2010, despite tightening of purchase tax incentives.

New vehicle sales reached a record-high 1.6 million units in January, an increase of 117 percent over a year ago. Passenger vehicle demand rose sharply, some 122 percent, to 1.1 million units while light commercial vehicle sales increased 105 percent to 480,000 units.

The January figures translate into a seasonally adjusted annual sales rate of 18.5 million vehicles - up 20 percent from December's rate of 15.3 million.

Early boost to 2010

It is also thought that some companies might have pushed part of their December sales figures into January after exceeding 2009 targets to provide an early boost to sentiment and bookkeeping in 2010.

Both domestic-made and imported vehicle prices are reported to have climbed around 2 percent in January over December in major cities. Insufficient supply was thought to be the key factor, with surging purchases before the Chinese New Year in February giving dealers the confidence to limit discounting.

Almost every brand recorded double-digit or triple-digit growth in January. Sentiment across the industry is very different today from what it was a year ago, when most companies were expecting a sluggish market in 2009.

Optimism is now rife. Sales targets for 2010 for most automakers are above 10 percent growth, with some as high as 80 percent.

Second-tier cities

There are good reasons to believe the Chinese automotive industry will maintain strong momentum this year, including in second-tier cities and rural areas, due to continuing incentives and new development plans, improving road conditions, recovering export demand and expanding capacity.

But not all is positive in the market, with quality issues now garnering even more attention than usual.

In addition to Toyota's recent travails, Honda, Mitsubishi, Suzuki, Kia, Volkswagen and Geely have all issued recalls in one form or another so far this year. We believe this is merely the tip of the iceberg.

It has been five years since the government drew up its regulations on vehicle recalls. In 2009 a total of 1.3 million vehicles were recalled, accounting for 10 percent of new vehicle sales.

The number of vehicles recalled in the US in 2008 was higher than new vehicles delivered that year. It seems improbable that vehicle quality in China is much better than in the US, so the situation in China has the potential to turn much grimmer.

Afraid of negatively impacting their brand image, carmakers in China typically try to address vehicle quality problems during regular maintenance checks, shielding problems from publicity and governmental awareness.