WHEN Brazil announced the lifting of taxes on imported cars and trucks last month, it was another blow to Chinese automakers eager to expand exports to South America and other continents.

Brazil, the world's fourth-largest car market, raised the industrial product tax on cars to as much as 55 percent in instances where vehicle models fail to meet a standard of 65 percent local parts.

The action was taken to protect Brazil's domestic automotive industry as the surging local currency, the real, made imports cheaper.

During a recent automotive forum, Wang Xia, secretary of the Automotive Industry Commission of China's Council for the Promotion of International Trade, warned that shrinking cost competitiveness, weak brand recognition and escalating price wars threaten prospects for expanding Chinese auto exports.

"If those problems can not be solved, the overseas ambitions of Chinese automakers may go the way of China's failed motorcycle export dreams," said Wang.

Vehicle exports so far this year have looked quite promising for the country's domestic auto industry.

Car exports in the first seven months of this year rose 57 percent to 454,400 units, according to the China Association of Automobile Manufacturers. That increase outpaced weak 3.2 percent growth in domestic new car sales in the world's largest auto market..

In August, vehicle exports hit a new monthly record at 86,200 units, soaring 83 percent from a year earlier. The gains were largely attributed to signs earlier this year that the world was poised to regain its footing after the 2008-09 economic meltdown. That rosy outlook is looking more doubtful by the month amid predictions that major economies may slip back into recession.

Many Chinese automakers are relying on exports to offset slower vehicle sales growth at home, as the government phases out purchase incentives and several traffic-clogged major cities seek to limit new vehicle registrations.

For domestic carmakers, exports represent a key channel for sales growth as foreign rivals expand into the lower end of the market traditionally dominated by Chinese manufacturers.

Yin Mingshan, chairman of Chongqing Lifan, said overseas sales accounted for 55 percent of his company's total sales this year.

"Overseas market plays a vital role in helping us weather sales fluctuations in the domestic market," he added.

Other Chinese automakers also benefited. Chery Automobile said it sold 122,441 vehicles overseas in the first three quarters of the year, an 80 percent increase from the same period in 2010. Jianghuai Automobile Co said it achieved exports of 50,000 units, representing a 277 surge in the quarters. Robust sales prompted the carmaker to lift export target to 70,000 units this year.

Advantage weakens

Analysts agree that China's large and relatively cheap labor force gives automakers a competitive edge in foreign markets. In Venezuela, for example, the price of a Chery A1 compact sedan sells for a third lower than models rolled out by its competitors.

But such cost advantages are waning as China's high inflation rate forces carmakers to offer higher salaries to keep workers. Then, too, the steadily rising value of the yuan is making exports more expensive.

China remains under more pressure to keep appreciating the yuan. The US Senate has passed a contentious bill that would punish China if it keeps the yuan undervalued.

"The price advantage of Chinese vehicles is weakening amid the higher yuan, the increasing cost of raw materials and labor, and the imposition of more stringent overseas standards on fuel efficiency," said Zhi Luxun, assistant director of the Ministry of Commerce's Department of the Mechanical, Electronic and High-Tech Industry.

Fierce competition among Chinese carmakers at home is moving offshore.

"Like other products, Chinese vehicles end up competing with models rolled out by home rivals," said Lu. "When a new market looms, Chinese auto companies all pile in."

That zeal is understandable, but its problems are compounded by conformity.

"Chinese vehicles usually compete in the same category because of similar technology and quality," said independent auto analyst Zhong Shi. "Therefore, vicious price wars are inevitable, which not only hurt the brand image of Chinese cars but also pose threats to long-term growth."

The car export market also suffers from fragmentation. According to Zhi, China shipped 580,000 vehicles overseas last year through 500 separate auto exporters.

Perhaps the biggest current threat, however, is growing protectionism as countries try to protect their industries and workers in tougher economic times.

Brazil is not an isolated example. Russia increased the tax on imported cars by about 5 percentage points in 2009, following an earlier tax rise on imported knockdown parts.

Investment continues

Still, Chinese auto executives see potential in overseas markets and show no signs of backing down in the grab for higher profits and global positioning.

Vehicle exports represented about 3 percent of China car sales last year, a far cry from the 60 percent for foreign automakers in mature markets.

Lu Jianhui, deputy general manager of Chery, recently told reporters that his company expects to sell 180,000 vehicles in overseas markets this year. It wants to expand sales into Europe by the end of 2015.

"Over the next seven to eight years, our target is to export 1 million units annually," he said.

In order to boost the quality of those exports, Zhi said the central government may adopt new policies next year, lifting the threshold for auto export qualification and raising the standard on companies setting up overseas dealer networks.

He said China will also encourage consolidation in the industry to form larger, more competitive players.

Wang Xia has called on the government to lend more support to the auto export industry by allowing higher tax rebates on exports and by subsidizing technical research and development.

Chinese automakers are accelerating plans to build factories overseas to circumvent trade barriers and get closer to local markets.

On October 12, China's Beiqi Foton Motor announced plans to build a US$387 million plant in India. The nation's largest commercial vehicle producer cited huge market potential on the sub-continent.

Earlier, Chery began construction on a US$400 million auto plant in Brazil, the first wholly owned plant built by the company offshore. Chery has investments in 16 overseas plants.

A Great Wall Motor assembly plant in Bulgaria is due to start production at the end of this year, with a designed capacity of 50,000 units.

Lifan is teaming up with ZAMZAM SPRING, one of the largest distributors in Iraq, to build a car plant in the country.