Sales of passenger vehicles in China are expected to rise by more than 55 percent over the next five years, powered by the country's steady economic growth, according to a JD Power report released at the Beijing auto show.

The report said sales of passenger vehicles, including passenger cars, sports utility-vehicles and minivans, will reach 13.55 million units a year in 2015, up from 8.7 million units last year.

Larger automakers and long-established brands have recorded substantial profits in the past few years in China, it said.

This was especially true in 2009, when government stimulus and massive bank lending - the equivalent of one-third of China's gross domestic product - translated into soaring vehicle sales and record profits for many automakers.

That kind of stimulus cannot continue indefinitely, it said.

"China's rapid growth makes the automotive market highly attractive and almost irresistible to any automaker," said John Humphrey, senior vice-president of global automotive operations for JD Power and Associates. "However, for many brands, achieving their profit aspirations in China in the coming years will be far more challenging."

Obstacles ahead

The report also stressed that there are numerous market and structural obstacles that automakers must overcome in China. These include:

Hyper-competition. By 2015, there will be more than 90 automotive brands competing in China's passenger-vehicle market, more than any other market in the world and more than twice the number of brands in the United States. In addition, by 2015, there will be more than 300 models produced in China, and hundreds more models that will be imported.

The industry is ripe for consolidation. Yet rival provincial governments compete to defend their regional automotive industries and suppliers to drive local employment and tax revenues, resulting in a competitive landscape that will be little changed by 2015.

The lack of consolidation, as well as proliferation of products, will have adverse impacts on prices and profit margins.

Consumers outside the highly populated first-tier cities will become an important source of growth. Targeting which of the many second, third and even fourth-tier cities for expansion efforts will be critical and will increase the complexity of resource allocation, risks and costs. Finding high-quality dealers and dealership personnel will add to the challenges.

While foreign automakers will still hold an advantages in engineering, manufacturing and quality by 2015, the gap with domestic automakers will be closing. Chinese automakers will more aggressively assert themselves in their relationships with their foreign joint venture partners, especially in the areas of product strategy, distribution and marketing.

Subcompact, compact

The report added that among the 13.55 million passenger vehicles that are projected to be sold in China in 2015, about 57 percent will be sold in the lower-margin subcompact and compact car segments.

Within these two segments alone, there will be more than 125 vehicle models for consumers to choose from, it said.

In comparison, only 22 percent of passenger vehicles forecast to be sold in the United States in 2015 are expected to be subcompact and compact models, while 57 percent of passenger vehicle sales are expected to be higher-margin luxury car, SUV, pickup and minivan models.

It said total factory production capacity for passenger vehicles in China is expected to reach 19.6 million units by 2015 when the rate of capacity utilization is projected to be only 66 percent.

"The low rate of capacity utilization projected for 2015 will likely cause another dilemma for automakers in China as factories typically need to achieve at least 80 percent capacity utilization to cover high fixed costs," Humphrey said.

As a result, he added, automakers will be forced to look for ways to alleviate the financial stress these loss-producing operations cause, including options of consolidating, increasing exports and investing in more efficient flexible manufacturing technologies."

There are more than 13,000 vehicle dealerships currently operating in China, according to the report. One-third of dealers report that they are operating at either a financial break-even point or at a loss.

Most dealers depend on profits from new-vehicle sales to remain in business. Because new-vehicle prices will continue to come under increased pressure, there will be greater attrition of marginally performing retail outlets, the report said.