With pent-up demand sated, business is slowing for domestic and foreign vehicle manufacturers alike China's car sector looks like another case of an industry dream gone bad. Cars that once sped out of the showrooms now sit motionless in jam-packed inventory lots for months on end, even as manufacturers furiously build capacity to produce more. The same boom-to-bust cycle has played itself out in steel, cement, electrical appliances and other products. The only difference this time is that even big multinationals have been caught wrong-footed in a market they thought they understood. The dream began in 2000 with roaring optimism for a market of 1.3 billion people. Global carmakers anticipated explosive growth at a time at which their other major markets had matured. They piled in with new plants, flooding the market with new models that became increasingly cheaper. Their confidence was buoyed by two years - 2002 and 2003 - of extraordinary growth. In 2000, China produced 2.07 million vehicles, of which 607,000 were passenger cars. In 2003, the figure had more than doubled to 4.44 million, including 2.02 million passenger cars, and last year reached five million, of which 2.6 million were passenger cars. Rarely has there been such an increase in demand in the history of the industry. Company executives flew in and were dazzled by glistening skyscrapers, fancy restaurants and brand-new expressways. General Motors (GM) chairman Richard Wagoner said China would overtake Japan as the world's second-largest car market. The surge in demand left GM and the other global manufacturers no alternative but invest heavily in the country, where they were warmly welcomed by a government that wants to challenge Japan and South Korea as a car exporter. Then came the bad news. In the second half of last year, sales began to slow as dramatically as they had risen. Pent-up demand had been satisfied and a new wave of demand has yet to appear. In the first four months of this year, sales rose just 1.57 per cent year on year to 1.8 million units, with sales of passenger cars, at 1.15 million, down 0.62 per cent. The inventory of unsold cars, 450,000 at the end of last year, is forecast to reach 750,000 by the end of this year, more than double the normal level of 300,000. Car producers are losing money. In the first quarter, industry profits were 8.03 billion yuan, a drop of 58 per cent from 19 billion yuan in the same period a year earlier, according to figures from the China Auto Industry Association. Industry losses in the period rose 118 per cent to 3.64 billion yuan. Profits of producers of engines and parts and components fell 35 per cent and 33 per cent, respectively. Among the biggest losers is Dongfeng Yueda Kia Motors, a joint venture involving Kia Motors of South Korea in Yancheng, Jiangsu province, which posted a record 42 million yuan loss in the first quarter. Awash in red ink, big producers nonetheless continue to add capacity. On May 26, Volkswagen (VW) announced it had started work on a new joint venture factory in Dalian with FAW that would turn out 150,000 engines a year. On May 31, GM opened a new, US$249 million plant in Shanghai able to produce 170,000 vehicles a year. Analysts expect no relief for the carmakers for at least two years. 'The price wars will go on raging for at least the next two to three years,' said Lin Wenjun, a motor analyst at Capital International Holdings. JP Morgan forecasts an oversupply of 11 per cent this year and 23 per cent next. A report by the State Statistical Bureau last week said capacity was already 30 per cent above demand and the surplus could reach two million vehicles by the end of next year. In public, manufacturers do not want to say they are cutting back their plans. GM says it is continuing to invest the US$3 billion its chief executive promised last June. VW says that it will not slow its plan to invest Euro6 billion ($57.03 billion) between last year and 2008, forecasting annual average market growth of 10 per cent to 15 per cent until 2013. Complicating the equation is the fact that Beijing wants to turn two or three domestic companies into national champions that can compete globally. The front runners are Shanghai Auto Industry Corp, Dongfang Auto, FAW and Chery Automobile. The lucky firms will receive preferential loans from state banks, enabling them to expand production and acquire overseas companies, without being subject to the same market discipline as their foreign rivals. They will be able to keep capacity idle at minimum cost. Barking at their heels are private companies whose cut-price models are rapidly gaining market. All the predictions cannot come true. When companies awake from the dream, business sense will prevail - a drastic slowdown of investment plans, closure of domestic firms and the withdrawal of several foreign players.