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China's automotive industry is bucking the global downturn thanks to government subsidies and looks set to finish the year with stronger growth than initially expected. Sales of domestically produced vehicles in China rose 77.8% year-on-year (y-o-y) in September to 1.33mn units, marking the seventh consecutive month of sales over 1mn units.

According to data published by the China Association of Automobile Manufacturers (CAAM), sales were also up almost 17% from August. The total was buoyed by sales of passenger cars, which were 83.6% higher than September 2008 at 1.02mn units. September's strong performance takes sales for the nine months to September up to 9.66mn units, a 34.24% y-o-y increase.

As a result of the rapid growth, the report has raised its sales forecast for 2009 to 12.8mn units.

It is also believed that carmakers performance against the market next year will depend on the government's plans for the industry, however. So far, there has been no decision on whether the incentives will be carried over to 2010, which creates a certain amount of uncertainty for industry players.

In markets where incentives such as scrappage schemes have been introduced, a slump is expected in 2010 when the schemes are withdrawn. The government is also concerned that increased investment in new capacity to accommodate the surge in demand will lead to overcapacity in the industry. National Development and Reform Commission data show that the industry is currently using 80% of its installed capacity, and the department expects this to drop to less than 70% by 2013.

Although China has fallen to second place in the Business Environment Ratings for the automotive industry in Asia Pacific, its overall score has risen from 66.5 to 67.7. The market's highest scores are still for its production and sales growth potential, based on the forecasts up to 2013, although signs of a slowdown in the market have been evident. However, even though a low level of vehicle ownership can look tempting in terms of possible growth, the low score for country structure (caused by the large gap that exists between wealthy towns and poorer rural areas) acts as a clear restriction on potential penetration. In terms of China's macroeconomic environment, a healthy long-term political and economic outlook ensures strong scores for the country's risks to realisation of returns.

General Motors Company (GM) continues to lead the market through its SAIC-GM-Wuling and Shanghai GM joint ventures (JVs), and the US carmaker has big plans to ensure its largest market continues to play a pivotal role in its global strategy. GM China's president, Kevin Wale, expects the company to sell 1.6mn units by end-2009, after registering a 55% jump to 1.3mn units in the nine months to September. However, German rival Volkswagen (VW) intends to invest EUR4bn (US$5.8bn) in its operations on the mainland up to 2011. The injection will fund an expansion of it JV plants in Nanjing and Chengdu, where it plans to begin producing new models from 2012. According to VW CEO Martin Winterkorn, the current capacity of the plants is not enough to keep up with rising demand.

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