China's auto industry hit the fast track with double-digit growth after the country's ascension to the World Trade Organization in 2001. Its automobile production shot up from 3.25 million units in 2002 to 18.26 million units in 2010, overtaking the United States as the world's largest auto producer for two consecutive years.

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However, auto sales growth dropped sharply in 2011 to 2.5 percent from 32.4 percent in 2010 in the face of a slowing economy and the exit of stimulus policies. In the first half of this year, auto sales growth remained sluggish at 2.9 percent amid waning GDP growth of 7.6 percent, the weakest in three years.

The slowing auto market has ushered in concerns that excessive capacity looms large.

The automotive industry in China is currently facing serious overcapacity issues, which will potentially worsen, KPMG China said in a recent report.

It is estimated that the planned auto capacity of China's 12 major automakers will surpass 30 million units, far exceeding market demand, according to the National Development and Reform Commission, the country's top economic planner.

"There is overcapacity in the automotive industry. We will most likely see some consolidation in the industry as a result of overcapacity," said James Chao, Asia-Pacific director with IHS Automotive Consulting.

There needs to be a critical shift from quantity to quality if the Chinese automobile industry is to continue flourishing, KPMG China said in its report.

Lewis Liu, director of Automotive Advisory of KPMG China, said only those automakers with scale, economic efficiency, superior technologies and market-accepted brands are able to participate in international competition and survive, and the rest should be pushed out of the market.

"The government's role should be to recognize the importance of those principles of market development and guide the replacement of outmoded capacities," Liu said.

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