The mainland's car market could grow 12 per cent annually in the next four years, driven by rising household wealth, says business advisory firm AlixPartners.
But intensified competition could cause some weak carmakers to leave the market because of overcapacity and narrower profit margins.
"There can be short-term disruptions," said Ivo Naumann, the head of the firm's Shanghai office. "But the underlying fundamentals for China's auto industry are still intact and steady growth can be still expected."
Naumann said the key driver for the world's largest car market remained rising affluence that fuelled demand for vehicles. AlixPartners believed the market would grow 8 to 12 per cent annually in the next four years.
According to the China Association of Automobile Manufacturers, the industry reported sales of 10.98 million units between January and July, up 3.56 per cent from a year ago. But concerns were mounting that the market would see a severe slowdown in growth or even a drop in sales in the coming few years following the breakneck pace of growth in the past few years.
However, the government could drive the market up significantly by launching incentives, Naumann said.
In 2010, car sales nationwide jumped 32 per cent to 18.06 million units, buoyed by Beijing's reduction in consumption tax on small cars.
One of the biggest issues the industry faced overcapacity, AlixPartners said. The production capacity utilisation rate fell to 67.3 per cent from 85 per cent in 2010.
Japanese and Chinese models continue to lose market share while domestic models are facing increasing cost pressure as they offer aggressive price cuts to survive the fierce competition.