One of the most significant developments in China's industrialization is the growth of China's automotive industry, which is a catalyst for many other linked sectors of its economy. China's focus on its auto industry and the supporting infrastructure and development patterns could have significant implications for global auto manufacturing and trade. While the U.S. automotive market was impacted by the global economic downturn that started in late 2008 and throughout 2010, the Chinese auto market has been growing rapidly. It has been a bright spot for foreign auto makers with a presence in China, such as General Motors (GM) and Volkswagen (VW). Spurred by the central government's stimulus spending and financial incentives to encourage vehicle ownership, the Chinese vehicle production was over 18 million units each in 2010 and 2011. In the span of just a few years, China has become the world's top auto producer and also the biggest auto sales market. It is not clear whether China will mainly consume automobiles in its own market, take a more aggressive export-oriented approach similar to that of Japan and Korea, or create some mixture of these two. Industry data and forecasts suggest that China may take a hybrid approach that focuses on domestic consumption while also building vehicles for export in order to induce Chinese companies to produce world class cars. Additionally, China's automotive parts manufacturing sector is export focused, increasingly complex, and rapidly moving from low-cost to more value-added production. As China becomes a bigger player in the global auto market, its impact on the domestic U.S. industry could increase. So far the most significant impact may be in automotive parts exported into the United States. While U.S.-China trade in motor vehicles is relatively limited, and likely to remain so for the short- to medium-term, bilateral trade in auto parts has grown significantly since 2001. The Obama Administration has taken direct measures to address U.S.-China automotive trade, such as the tariffs on Chinese tires. However, as China becomes a top automotive manufacturer and a major consumer market, there are lingering concerns about the conditions under which U.S. manufacturers must compete with Chinese firms both in and outside China, including the domestic U.S. market. These concerns have focused on such issues as China's export restrictions on certain raw materials, including rare earths, which are necessary for many auto parts production, including those for use in hybrid and electric cars; China's incomplete implementation of its commitments as a member of the World Trade Organization, especially with respect to domestic content rules, protection of non-Chinese firms' intellectual property rights, and technology transfer requirements; the extent to which Chinese firms are subsidized or otherwise supported and protected by the government when they compete with foreign companies domestically and with imports into China; and the implications of China's recently announced restrictions on foreign carmakers' expansion in China amid the government's efforts to promote domestic producers, for example, how they may affect U.S. auto companies' profitability and business prospects in China. This report provides an overview of China's auto sector development, including vehicle production, sales, market drivers, manufacturers, and automotive trade. It discusses the operations of foreign auto makers in China, the emergence of domestic manufacturers, and the relationship between the two. It also examines how the Chinese government policies and measures guide and often direct the evolution of China's auto sector and discusses the prospects and implications for international automakers operating in China. China's automotive industry was established in the 1950s, under the guidance of the Chinese Communist Party Central Committee and with assistance from the former Soviet Union. Although the automotive industry has always been viewed as a strategic sector to move the country into the modern industrial age, it did not substantially develop until the late 1980s, after Chinese leader Deng Xiaoping came to power and moved the country toward economic and trade liberalization. In 1988, after a visit to China and its fledgling automotive industry, then-Chrysler Corporation CEO Lee Iacocca is said to have reflected that China's modernization process would be, "A long haul. A very long haul." Since the late 1980s, Chinese vehicles have become increasingly sophisticated as a result of partnerships with major foreign automakers (e.g., VW, GM, Toyota, Honda, Nissan, Mazda, Hyundai, and Kia) designed to foster "cooperation in technology development." An activist government policy has liberalized the Chinese automotive sector in some key respects such as permitting foreign investment, but it requires foreign manufacturers to undertake joint ventures with local partners in order to obtain market access. The stated goal of the Chinese government then was to create a market dominated by a limited number of internationally competitive joint venture assemblers, supplied by local parts manufacturers, and producing to world standards. After nearly three decades of rapid economic growth, the domestic Chinese auto industry has made substantial progress. Many independent domestic automotive manufacturers have emerged and have ambitions to become global auto companies. Although they have to overcome hurdles, such as creating their own designs and meeting world standards in terms of product quality, safety, and environmental features, the domestic manufacturers are expanding their market share and are slowly moving up the value chain. China's annual vehicle output increased from less than 2 million vehicles in the late 1990s to over 18 million in 2011. Its auto industry is already a major force propelling the Chinese economy and its workforce, with an annual gross output of more than Rmb 3 trillion yuan (approximately $ 440 billion) in 2009 and over 3.7 million workers in automotive production, according to China's auto industry association and official. Figure 1 illustrates the speed with which China has become one of the world's top automotive manufacturers. China first produced more than 2 million vehicles, of all types, in 2000. Since then, it surpassed South Korea (in 2002) and France (not shown on graph, in 2003). With nearly 5.8 million units of total production in 2005, China approached the production level of Germany, Europe's largest national producer and then-number three in the world, and eventually, overtook Germany for third place in 2006. Since then, China's vehicle production has accelerated, passing the 7 million mark in 2006 and approaching 9 million units in 2007. From late 2008 throughout 2009, with the global economy mired in an economic slowdown, global vehicle production dropped more than 10 million units in 2009 from the record high of over 72 million units built in 2007. The impact of the downturn was particularly pronounced for U.S. automakers, with two major U.S. companies, GM and Chrysler, filing for bankruptcy and restructuring their operations. China's automotive industry, on the other hand, showed considerable strength and continued to expand. With an output of 9.5 million vehicles in 2008, China overtook the United States in total vehicle production for the first time and became the second-largest motor vehicle producer—trailing only Japan, which produced 11.6 million vehicles that year. An economic stimulus package initiated by the government in 2008 enabled China's auto industry to continue its rapid growth in 2009 and 2010. In 2009, China produced more than 13.6 million vehicles, overtaking Japan to be the world's largest producer. In 2010, the growth momentum continued, bringing China's vehicle production to nearly 18.3 million units, almost doubling its 2008 output. Moreover, among the leading vehicle producers, China has been the only one showing substantial and continuous growth in production levels since 2000, though its growth seems to have flattened in 2011. Auto sectors in other parts of the world didn't fare as well during the economic crisis. At the pre-recession level in 2005, North America and Western Europe each produced more than three times as many vehicles as China. Between 2005 and 2009, however, total U.S. production was halved to 5.7 million units; Canada also registered a net decline of over 1 million units. Even Mexican production, which appeared to be the most resilient among the North American carmakers, saw a slight decrease of over 100,000 units between 2005 and 2009. In 2010 and 2011, the United States auto sector started to recovery, finishing in 2011 as the second-largest auto producing country, behind China. For carmakers in Europe (after an increase in production between 2004 and 2007), overall production dropped by about 6 million units in 2009 from the 2007 level. Japan, formerly the largest motor vehicle producer, had shown relatively little overall growth in production before being affected by the global recession. This was, in part, because of a domestic economic slowdown that has lasted for nearly two decades, the strengthening of the yen, and increased production in overseas manufacturing plants. Its total output has stagnated at around 10 million vehicles per year between 2000 and 2003. Strengthening exports, including to China and the United States, led to an increase to about 11.6 million units of production each in 2007 and 2008. In 2009, hit by global economic crisis, Japan's auto production dropped to below 8 million units. Production level slowly recovered in 2010, and then dropped again in 2011 to below 8 million units, in part because of the severe earthquake and tsunami that hit northern Japan in March 2011, which had an immediate impact on the auto industry. Among the developing nations, China's increase in output has also placed it far ahead of other countries that are considered as actual or potential major automotive producers. In the so-called BRIC countries (Brazil, Russia, India, and China), which showcase emerging economies, there has been considerable growth in automotive production (see Figure 2 ). However, the combined net growth of vehicle production in these other three BRIC countries between 2000 and 2011 was only slightly over a quarter of the total volume growth in China. Along with the volume of vehicles, product composition of Chinese motor vehicle output is also changing toward meeting growing domestic consumer demand for personal vehicles, notably passenger cars. This is closer to the model of production seen in a mature industrial market than in a developing economy.