Toyota Motor Corp, the world's most efficient carmaker, is paying the price for coming too late to China. In the first seven months of this year, sales of the Vios, one of its top three models in China, tumbled more than 30 per cent year on year, lagging the rival models of Honda Motor, Kia Motors and General Motors. Its total sales in the period of about 85,000 were less than 4 per cent of the passenger car market. But, by 2010, it wants to sell one million vehicles in the mainland. 'The China market is growing at one million vehicles a year,' vice-chairman Fujio Cho said. 'It is only a matter of time before it becomes the biggest car market in the world. Our initial target is 10 per cent of the market in 2010.' Toyota's problem in China is not one of production or technology, of which it is the industry king. It is a miscalculation of the potential of mainland consumers. Uneasy of the political risks caused by anti-Japanese feelings in China, the firm did not start producing cars there until more than a decade after market leader Volkswagen. It has a national sales network of 150 dealers, compared with more than 1,000 for Volkswagen. The first Chinese-made Toyota, a Coaster truck, only rolled off the production line in December 2000 and its first Chinese-made passenger car, the Vios, in October 2002. By the time it got its marketing act together, it had missed the one-time demand explosion of 2001-03. Annual growth in the market will slow to about 10 per cent this year with sales of about 5.5 million vehicles, down from 15 per cent last year and 75 per cent in 2003. Rising oil prices, the increasing cost and inconvenience of parking in the cities, tighter bank credit and the expectation of lower prices are all hurting demand. Official forecasts put excess capacity in China's car industry at 30 per cent this year, with the surplus likely to reach two million units by the end of next year. In its latest research report, JP Morgan advised investors to cut their positions in mainland car stocks. 'We disagree with the view that the worst is over for the sector. Past experience shows that car demand will retreat once there are signs of oversupply and price cuts as jittery consumers postpone their car purchases until retail prices stabilise to avoid losses,' it said. But few dare to bet against the world's most efficient and profitable vehicle manufacturer. Last year, Toyota surpassed Ford Motor to become the world's second-biggest producer after GM, with sales of 7.4 million units in the year to March, up 10.3 per cent from a year earlier, and net income rising 0.8 per cent to US$11 billion. In dollar terms, Japan accounted for 40 per cent of the carmaker's sales, North America 33 per cent and Europe 13 per cent, with China a fraction of the remainder. Nervous of over-dependence on its home market, the company is expanding aggressively overseas, especially China. It has a joint venture with First Auto Works in Tianjin, which produced 86,000 passenger cars last year, and another with Guangzhou Auto Group in Nansha. This year, the company plans to sell 145,000 cars - mainly Vios, Corolla and Crown sedans - in the mainland and will launch the Reiz and Prius hybrid before the end of the year. It intends to raise capacity to 335,000 by the middle of next year when the Nansha plant starts full operations. A spokeswoman for Toyota's China headquarters in Beijing declined to comment on how it would reach the 10 per cent target by 2010. But United Securities analyst Qian Xiaoyu was bullish on the carmaker. 'When it reaches 10 per cent is a matter of time before or after 2010. It has models for different segments of the market, although fewer than GM. Toyota and Hyundai will take market share from Volkswagen, which now has 20 per cent but cannot keep it,' he said. 'In general, Japanese and South Korean carmakers will do better than those from Europe and North America because their models and service are more suitable to Chinese consumers.' Toyota's mainland strategy is to repeat the successful model it has followed round the world - building round its plants a cluster of suppliers in order to replicate the 'just-in-time' delivery system and minimum inventory. Close to the Tianjin plant are nearly 200 manufacturers of parts and components, most of them invested by Japanese firms that supply Toyota at home. It is doing the same thing in Nansha. 'The most important characteristic of Toyota is the improvement of quality and elimination of waste,' Mr Cho said. 'We calculate precisely the utilisation rate of workers, raw materials and equipment to remove this waste.' But Toyota is facing competition not only from global rivals but from Chinese manufacturers aiming at the lowest segment of the market. Industry experts expect the number of cars sold for less than 100,000 yuan to account for 45 per cent of the market, up from 24 per cent in 2003. Toyota has no models in this range. The cheapest car in the market is the QQ, which sells for just below 30,000 yuan and is made by domestic firm Chery Automobile. Toyota's newest model will be the medium-range Reiz, which will roll off the Tianjin production line next month, with the cheapest model on offer at 213,800 yuan. It aims to undercut the leader in this segment, Guangzhou Honda's 2.4-litre Accord, priced at 239,800 yuan. One of the firm's most aggressive foreign rivals is Hyundai, which began production at a joint-venture plant in Beijing in December 2003 and sold 150,000 units last year, its first full year, thanks in part to price cutting. The plant has already achieved a 75 per cent local-content rate for its Sonata and Elantra models.