Domestic and foreign car makers in China are upping the ante of their presence in the world's largest auto market, giving rise to concerns that the industry is driving headlong into a glut that could torpedo sales and profits in a few years.

The warning signs of overcapacity are clear and come as booming car sales are slowing and traffic gridlock is pushing more cities to restrict car ownership.

Volvo Car Corp, which was bought by China's Geely Holdings Group last year from the Ford Motor Co, announced recently that it will build two plants in China capable of churning out 100,000 cars a year by 2013.

Domestic sports utility vehicle maker Great Wall Motors Corp's new Tianjin plant begins operation this month, adding another 800,000 units of capacity when the third construction phase is completed in 2015.

During the 12th Five-Year Plan starting this year, the combined output of major car makers is expected to reach 40 million units a year, a significant 45 percent jump from last year's level.

Some industry analysts argue that a certain amount of extra inventory is necessary in any developing auto market and that market forces will play their role.

But a recent KPMG report concluded that overcapacity in the car industry is spreading from mature markets like the United State into the emerging markets of China, India and Brazil.

Over a quarter of executives surveyed for the report said they expect China to be building 20 percent more cars than the market can absorb by 2015.

It's not just domestic auto makers that are stepping on the gas in China. Foreign car makers, too, are planning major expansions.

General Motors, which says China replaced the US last year as its biggest market, with sales exceeding 2 million units, is lauding future prospects.

"We expect the automotive market in China will continue to grow as the fundamentals are still solid, although the growth rate may be at a more sustainable rate," the company said in a statement.

GM China sold 2.35 million units in 2010, short of its current capacity of 2.8 million units

"We will continue to invest to capture the growth opportunity," said GM.

Interest and investment in China ramped up after the 2008-2009 global economic crisis slammed the brakes on car sales in developed countries, forcing some auto makers to seek government bailouts to survive.

Slower sales

In China, car sales in February rose 4.6 percent year-on-year to 1.26 million units. The rate was down considerably from a 120 percent surge in January 2010. The slowdown was attributed to the government's withdrawal of incentives for buyers of new small cars.

Most industrial analysts agree that China's market is not likely to sustain explosive growth in sales after nearly 10 years of rapid expansion. The China Association of Automobile Manufacturers estimates sales growth this year will slow to 15 percent or less.

China, which prides itself on new green initiatives, also resolves to tackle the growing problem of urban gridlock and emissions smog. Mega cities like Beijing and Guangzhou have already started to limit vehicle ownership by restricting license registration.

Still, China's market is huge, and car ownership remains small compared with developed countries. One in 19 people owns a car, compared with the global average of one in every eight people.

China's economics underscore the optimism of auto makers. The nation has been growing at 10 percent or greater for years, and incomes are rising. Cars have suddenly become more affordable to more people, and driving is now considered by many a necessity, not a luxury.

Auto makers looking at the math say they can't afford to sit on the sidelines.

"Overcapacity is a consideration, but if we do not invest in plants, we'll miss out on sales opportunities, which will be snapped up by our rivals," Bernd Pichler, managing director of Volkswagen (China) Import Co, was quoted as saying in KPMG's report.

"Even though some of our plants could potentially become surplus to requirements in a few years, it's a risk worth taking," he added.

Volkswagen earlier said it plans to invest 10.6 billion euros (US$14.8 billion) in the 2011-2015 period to strengthen its market position. New investment will expand capacity, with an additional two plants and the introduction of new models, including the Skoda Yeti sports utility vehicle and an electric car.

Sales of VW were up 37 percent last year to 1.92 million units in the Chinese mainland and Hong Kong.

The government is trying to maintain order in its domestic industry, calling for four big auto enterprises and four regional auto groups to evolve by 2015.

SAIC Motor Corp, the nation's biggest car maker, said it aims to turn out 6 million by 2015. Smaller manufacturers Chery, Geely and BYD have also unveiled ambitious plans to increase annual output to an aggregate 2 million units.

He Guangguan, former head of China's Mechanical Industry Department, said overcapacity is cause for concern.

Green cars

"Some local governments attract new auto projects with favorable land policies but lack any overall plan," he said. "To prevent blind investment, there should be stricter scrutiny and tougher approval procedures if car makers want to set up new plants."

While the production boom continues unabated, the government is trying to engineer an industry shift to more energy-efficient, eco-friendly vehicles.

Leaders want auto makers to leapfrog the new technology and be at the forefront of the global green-vehicle trend.

BYD's F3DM dual-mode, plug-in hybrid kicked off sales to individuals in March 2010.

Wang Chuanfu, chairman of BYD, said during the 81st International Geneva Auto show that his company plans to sell 20,000 green cars, including the F3DM and e6 electric car, in the next two years.

The e6 sedan is certified for sale in the Netherlands and will be the first Chinese electric car marketed in Europe.

Wang forecast that BYD would maintain 10 to 20 percent sales growth over the next five years, driven by sales of new energy vehicles.

Planned capacity for major auto groups by 2015

6,000,000 units: SAIC Motor Corp

The nation's biggest car maker said it aims to turn out 6 million vehicles off its assembly lines by 2015. It plans to have its own brands and localized models to account for 40 percent of the total. The Chinese partner of GM and Volkswagen also wants 20 percent market share on the nation's new energy vehicle market.

5,000,000 units: FAW Group

The second largest auto maker in China and also the Chinese partner of Toyota, VW and Mazda hopes expanded capacity will help generate a sales revenue exceeding 600 billion yuan by 2015. It is vying for a 20 percent share of the overall market, with its private cars totaling 2 million units.

5,000,000 units: Changan Automobile Group Co

The Chongqing-based auto group says fuel-efficient and new energy vehicles will be its breakthrough point in the next three years and strengthen innovation capability.

3,000,000 to 3,500,000 units: Beijing Automotive Industry Holding Co

Beijing auto is speeding up efforts to join the world's top 15 car makers by 2015. It aims to sell up to 3.5 million vehicles by then, including 700,000 units of self-branded cars as it seeks to enter the nation's first camp for making own-brand vehicles.

3,000,000 units: Guangzhou Automobile Group Co

Guangzhou Auto plans to lift capacity to 3 million units by 2015 with a sales revenue at around 400 billion yuan in an attempt to be the nation's top five car maker

2,000,000 units: Zhejiang Geely Holding Group

Privately owned Geely expects two-thirds of its total sales to be in overseas markets. Zhejiang Province-based Geely, also the owner of Swedish Volvo Car Corp, has developed five technology platforms and 15 product platforms, which could turn out more than 40 models by 2015.

2,000,000 units: Chery Automobile Co Ltd

Chery aims to turn out 2 million vehicles by 2015 and earn over 90 billion yuan in revenue. In the new energy car segment, it wants to sell 50,000 green cars per year by 2015.