CHINESE car brands are expected to take about 40 percent of the domestic market by 2012, according to a report from Global Insight Inc.
"There are a lot of opportunities for Chinese locals in the future. There are low penetration rates in the vehicle market and a trend to shift to the mid-class car segment," according to John Zeng, senior market analyst from the world's leading automotive consulting firm.
Favorable policies by national and local government also help promote domestic car brands, he said, as supply structures improve and there is easy access to advanced technology from suppliers.
Last year, more than 982,800 Chinese-branded models were sold, accounting for 25.6 percent of the total passenger car market, according to China's Association of Automobile Manufacturers.
The auto industry has experienced average growth of 25 percent over the past five years in China, where only 20 out of 1,000 Chinese people own a car.
Total vehicle sales hit 7.9 million units with a 25 percent growth last year, while passenger car sales topped five million units.
China is transforming from a bicycle kingdom into a car-driven society as people's incomes rise.
Chinese car makers have relied heavily on cooperation with overseas partners to gain quick profits over the past 20 years.
Global players such as Japan's Toyota Motor Corp, General Motors Corp, Volkswagen AG and South Korea's Hyundai Motor Corp have set up joint ventures in China and built up their brands.
But smaller and private players have seen the potential. They include Chery, Geely, Zhongxing, Chongqing Lifan and BYD.
They can be more flexible in restructuring production and focus on cheaper, smaller models.
"The fast growth of Chery and Geely was also partly helped by the strict auto policy in 1994, which led to foreign joint ventures mainly focused on the medium-to-large car market in the 1990s," said Zeng.
The market expanded quickly after state-owned enterprises such as First Automotive Works Group, Shanghai Automotive Industry Corp and Dongfeng Group were encouraged to build their own independent brands.
China's central government aims to have at least half the nation's car market supplied by Chinese brands by 2012, offering some financial support and indirect tax incentives.
Chery Automobile Co Ltd won its most market share, with 8.2 percent for the first quarter of 2007, Global Insight's report said.
The 48 percent sales increase helped it rank among the top three, up from last year's fifth position.
Volkswagen has a 16.2 percent share and is the market leader, while Toyota has a 7.5 percent market share.
Volkswagen has been a player in the Chinese market since 1985, while Chery only started making cars in 2003.
Local brands still gain sales mostly from cheap subcompact sedans, raising concerns about sustaining development with limited profits.
And joint ventures are challenging the market by tapping into the economy car sector, increasing competition and price wars.
"Domestic brands have a better understanding of local consumer needs, especially in the economy car market," Zeng said."They also benefited from government support and a low-cost advantage compared with overseas players."
Chinese car makers are working on offering more higher-end models after the growth in mid-class sedans.
Mid-class models will account for 42 percent market share of the total in 2012, bigger than compact and subcompact models, according to the Global Insight.
Production of Chinese-made mid-class sedans, which are priced between 100,000 yuan (US$13,157) to 200,000 yuan, is expected to more than triple, from 500,000 units last year to 1.5 million units by 2012.
More higher-priced models are expected since this year's launch of several models by Chinese car makers, including Chery F11, Geely GH-1 and FAW's HQE, which will help boost profits and lift their brand image.
Chinese car makers are also finding a way to quickly narrow their technology gap with overseas players and gain timing advantage by acquiring assets from overseas players.
SAIC's Roewe model, its first self-branded sedan, has received more than 6,000 orders in just one month after the company attended the 2007 Shanghai Auto Show in April.
The model, which sells between 235,000 yuan and 276,800 yuan, is based on the Rover 75 after SAIC bought the intellectual property rights from failed British MG Rover Corp for 50 million pounds (US$99 million).
Chery's Acteco engine was developed by AVL with assistance from Bosch and Delphi Corp.
In addition, the Chinese government is also encouraging the consolidation of Chinese makers to increase competition.
"The biggest three (SAIC, FAW and Dongfeng) are facing increasing pressure to build up independent passenger car brands and a high local R&D capability," Zeng said.
"There will be shake ups among smaller producers, leaving the big three car makers to retain their domination, with seven or eight younger, smaller players." Strengths and Weaknesses of Domestic Brands
Strengths
Better understanding of local consumer needs, especially in the economy car market
Government supports the development of domestic brands
Low-cost advantage, ability to provide better value for money
Efficient decision-making process, quick response to market change
Weaknesses
Lack of independent International perspective
Low price, low profit, low R&D investment; inconsistent product quality
Lack of economies of scale; consolidation is difficult due to local protectionism
Weak brand image. Focus primarily on low end of market.