So, the only reason why the retail prices are higher in China is because of the much higher profit margins domestic manufacturers make compared to their Western peers.

Insufficient supply dynamics, unequal seller-buyer relationship, and the distorted market structure mean domestic automakers can make super profits.

Take the sale of luxury cars in China.

The domestic luxury car market has long been dominated by brands such the BMW, Mercedes and Audi.

However, in the US and the European market, the three face fierce competition from such luxury brands as the Cadillac, Lincoln, Maserati and Jaguar, to name but a few.

International experience indicates that sufficient supply of same-grade cars will inevitably force carmakers to trim prices in order to drive sales.

For example, the Accord and Passat had almost the same market share in China's intermediate and high-grade sedans category until 2007 when Toyota's Camry hit the market. At that time, the Passat 1.8T automatic was sold for as high as 200,000 yuan.

Growing competition among same-grade luxury sedans following Camry's launch caused prices to decline by a large margin. The price of a Passat 1.8T fell drastically, to 150,000 yuan, a 25 percent reduction.

Globally, automakers compete fiercely, and so, each non-luxury car nets them a profit of only a few hundred dollars or even less.

In China, however, the sale of an Audi sedan can fetch the distributor an incentive of as much as 10,000 to 15,000 yuan, not to mention the huge profits made by its maker.

Be that as it may, domestic carmakers must address some pressing problems to stay afloat in coming years.

Despite booming market demand, domestic automakers invest poorly in technology or research.

Therefore, innovation must be made the top priority to improve the sector's development prospects.

Compared with domestic carmakers' lack of enthusiasm for new technology, their foreign counterparts have long invested large sums into developing new technologies.

BMW, for example, takes just five or six years to develop a new-generation of cars.

Domestic automakers must realize that technological innovation is vital for the sector's long-term development, and profit seeking will seriously hamper their future viability as independent carmakers.

Following last year's bullish market conditions, the domestic auto market is already showing signs of a slowdown in the first quarter of this year.

As China opens its doors to more foreign manufacturers, domestic automakers with little to show by way of technology advantage will likely be overpowered by powerful competitors from abroad.

The author is an anchor with Shanghai-based China Business Network.

(China Daily 07/15/2010 page8)