By Nick Mackie China business reporter, BBC News

Western car giants are teaming up with Chinese firms

Carmaker after carmaker is downsizing operations in Europe and the US, shedding jobs by the thousand.

In Asia, meanwhile, the same car giants are on an investment frenzy, spending $13bn (�6.98bn) to triple annual capacity to six million units by 2010.

Foreign vendors hold a 70% share of the Chinese domestic market.

And with sales up 57.5% in April from a year earlier, industry figures say, the Chinese car business would seem super-healthy.

But the rapid growth could mean trouble ahead.

Analysts warn Chinese supply could outstrip domestic demand by a factor of two by the end of the decade, while more than 100 domestic producers are keen for a piece of the action.

Foreign sales, therefore, are a must.

"They will increasingly have to consider exports as a way to get rid of their output in China - and as a means to reach crucial economies of scale," says Malte Meyer, auto industry consultant at Fiducia Management in Beijing.

Design disputes

The Chinese government welcomes foreign direct investment with open arms.

But it remains disappointed that two decades after foreign automakers first started producing in China, their local partners remain unable to obtain core technologies.

The original equipment manufacturers (OEMs) have guarded their secrets and dominated the domestic market - hence the emergence of clones.

Cloning is happening and the Chinese won't stop soon Malte Meyer, industry analyst

The OEMs lack adequate legal protection from intellectual property theft in China.

General Motors (GM) has recently settled a major row with Chery - a state-owned manufacturer in Anhui Province, which has a US distribution deal inked in for 2008.

One Chery model, the popular QQ compact car, is a near-twin of GM's Chevrolet Spark, albeit about 30% cheaper.

To avoid a lengthy court battle, GM appears to accept its existence so long as it remains in China.

On China's roads, lookalike BMWs and Hondas are also commonplace - notably SUV models.

Sales push

These are a serious irritant to the global brands - but not, analysts say, the biggest threat.

China wants local carmakers to boost investment and production

"Cloning is happening, and the Chinese won't stop soon," says Mr Meyer.

"But it is not this much of a problem in terms of competitiveness. Global OEMs must be more wary of Chinese companies moving into their own development, their own R&D efforts, their own brands."

Beijing wants local companies to fight for market share by developing their own designs, and to aggressively boost exports of cars and components by 40% annually to $70bn by 2010.

This places the global brands in a curious position: they invest billions in manufacturing partnerships with which their partners want to compete.

Many of the biggest such concerns are state-owned.

One is Shanghai Automotive Industry Corp, which partners GM and Volkswagen in China and has announced plans to roll out its own brand over the next three years.

Including sales abroad, it believes it can shift more than half a million cars a year.

Looking ahead

And it is not only the state-owned players which want a place in the new car market; privately-owned Chinese carmakers have ambitious plans too.

Geely, a former refrigerator maker, has made a name for itself at home by producing compact cars for the low end of the market. Now it also makes sedans selling for less than $10,000.

It already sells to the Middle East and Africa. But by 2010, it plans to boost production six-fold to 750,000 vehicles a year - and export half of them.

Indeed, it is aiming to start selling to the US, the world's largest car market, by 2008 - as long as it can get its cars to satisfy US regulations and thus prepare itself for the world's most litigious consumers.

New faces

An even newer arrival, Chongqing Lifan, is China's leading motorbike exporter.

Its boss, Yin Mingshan, cannot even drive a car - but still plans to make millions from building them.

In order for us to get Lifan's foot in the US and Europe... we must focus on safety and environmental standards by improving our technology and our quality Yin Mingshan, Lifan

The group's first model, the Lifan 520 - in Chinese text messaging the numbers mean "I love you" - is a 1.6 litre saloon car with a price tag of about $10,000.

Lifan has distributors in Russia, Saudi Arabia, Iran, Albania and Nigeria. But it accepts it is not yet ready for the European Union or US.

"We know that in the US and in Europe, that standards are higher than in China," says Mr Yin.

"In order for us to get Lifan's foot in the US and Europe - and all over the world - we must focus on safety and environmental standards by improving our technology and our quality."

From Brazil to Chongqing?

The technology issue remains problematic.

While carmakers in China enjoy a huge wage and benefits cost differential - less than $4 an hour compared with $70 in US factories - domestic producers still need to import many components.

This is why Lifan is interested in buying an engine-making plant in Brazil. The plant is owned by DaimlerChrysler and BMW, but this joint venture will be reviewed in 2007.

If a deal emerges, Mr Yin has floated the idea of uprooting the plant from South America and moving it to Lifan's base in Chongqing, 1,600km (994 miles) inland from Shanghai.

Not many Chinese carmakers can match this kind of dynamism.

Most of the country's 100-plus car plants survive on local government support and fall short of the industry's R&D spending benchmark of 5% of turnover.

But even though the serious players number in single figures, they nonetheless aim to get the quality right and undercut competition on price.

As for the big foreign names, they can't resist China's economies of scale - despite the overcapacity.

And that means both global and Chinese brands will be flooding the world's forecourts with cars bearing "Made In China" plates on the chassis.