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China, the world's fastest growing car market, will face major overcapacity problems within two years, auto industry consultants at KPMG warned on Wednesday.

Almost all the world's top carmakers have poured money into China in the last few years, hoping to make big profits from one of the industry's rare growth regions, and experts are now growing concerned about the risk of oversupply there.

"Overcapacity will be a major factor within two years, with the passenger car market -- already the single most important sector within the Chinese vehicle market -- likely to be at the forefront," said Paul Brough, managing partner of KPMG's Financial Advisory Services practice.

In a presentation to be delivered at a conference later on Wednesday, he noted that annual vehicle sales in China had grown to 3.3 million units from 1.4 million over the last eight years and that KPMG expected future sales to grow at an annual rate of eight percent between now and 2015.

But as all the major players have raced to take advantage of the opportunity, potential problems are mounting.

While car sales rose 77 percent from January to July this year to 998,000 units, capacity within the Chinese car market is expected to hit 2.7 million units this year, of which 45 percent would be from plants based on foreign investment, said KPMG.

It said it expected that between ten and fifteen million Chinese households would be able to afford a car by 2010, and that the government had opened up the car financing market.

But the changes would not be sufficient for demand to catch up with supply, the consultancy said.

"In fact, even with car sales forecast to hit 1.8 million in 2003, there is potential overcapacity in the market of nearly one million units, or 50 percent of forecast sales," said KPMG.

That overcapacity is expected to rise to 2.3 million units by 2005, or "a staggering" 90 percent of forecast sales, it added.

Foreign carmakers are planning to spend $10 billion in China in the next few years and experts argue that there will be many losers as supply outstrips demand. Volkswagen is the biggest foreign player there with a 38 percent market share, but competition is intensifying.

Only last week the luxury Mercedes arm of DaimlerChrysler signed a one-billion-euro deal to make luxury cars and trucks in China with Beijing Automotive Industry Holding Co.

Foreign carmakers have been obliged by law to have a domestic partner to operate in China. KPMG's Brough said the first outward signs of overcapacity were already showing up in declining prices. Average car prices in China fell seven percent in the first half of the year.

"Further overcapacity will see increased price pressures on sedans as well as lower prices and margins. Taking the reasoning to its ultimate extreme also raises the fear of some new production facilities becoming real white elephants as capacity is inevitably scaled back at some point," said Brough.

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