General Motors Corp. (GM), the world's top auto maker, posted record first-half sales in China and expects 20 percent-plus growth for the year as it closes in on Volkswagen AG in the world's number-three vehicle market.

The U.S. icon — which lost $1.1 billion globally in the first quarter — expects sustained profit from China after it sold 308,722 vehicles in January-June in its second-largest market, up 18.9 percent from a year earlier, China chief Kevin Wale told Reuters late on Tuesday.

Wale's full-year projection was much more aggressive than an April statement that GM wanted to keep pace with the market's expected 10-15 percent expansion.

Despite roaring growth that still leads much of the world, analysts say margins in China's auto market have been eaten away by price cuts, high steel prices and cut-throat competition.

"China continues to be a very solid profit contributor," said who last headed GM's UK operations.

"It's natural for margins to compress as markets get more mature and more competition comes in. It's our responsibility to find ways to offset that," said the Australian-born executive, who was appointed to his post in March.

GM's first-half sales growth lagged PSA Peugeot Citroen's (search) 30 percent from January to May, and Hyundai Motor Co.'s (search) near-doubling in the first half, though the latter two firms' Chinese operations are much smaller.

Global auto makers from Ford Motor Co. (F) to Honda Motor Co. (search) are investing $15 billion to triple capacity to 7 million cars annually by 2008, but that influx of players has wiped out hefty double-digit margins.

Average prices dropped 16 percent in the fourth quarter alone, Nissan has said.

Beijing's clampdown on auto loans further cooled 2004 sales, which rose just 15 percent after almost doubling in 2003.

"In fairness, we're coming off of a period of sensational profit and growth — the world hadn't seen it in 20 years," said Michael Dunne, President of Automotive Resources Asia (search).

"China was just coming out of an era of protection, so there wasn't a lot of competition. Ravenous demand for big cars meant high growth, high profits — home run. No one's going to see those profits again."

Still, the industry has shown signs of regaining momentum: in past days, Peugeot and Hyundai have raised 2005 sales targets by 15-17 percent, albeit working off a smaller base.

"I don't think there's a magic answer. It's just if you look at the fundamentals, the fundamentals say growth should continue," said the 50 year-old Wale.

The Detroit auto giant expanded its share of the market to 10.9 percent at the end of June, from 10.4 percent at end-March and 9.4 percent last year.

Volkswagen has seen its dominance in China slip steadily from about a quarter's market share at the end of 2004 to an estimated 13-20 percent now. Some analysts reckon the German firm will post a loss in China this year.

Industry executives and analysts said market share comparisons were difficult as VW makes only cars and dominated that market, while GM sells commercial vehicles such as trucks as well. Official industry sales data is due next week.

"Depending on how you calculate the numbers, in many respects we are already leading the market," Wale said.

China had proved a godsend for GM, yielding a fifth of group net earnings in the 2004 third quarter.

Now, slowing growth in the country has compounded a plethora of woes — from dismal sales at home to soaring healthcare costs — at GM, which in April posted its worst quarterly results since skirting bankruptcy in 1992.

GM's profits in China were $417 million last year, just $3 million higher than in 2003. In the first quarter, net earnings from China plunged 80 percent to $33 million.

Still, Wale said GM was sticking to plans to invest over $3 billion with Chinese partners to double capacity to 1.3 million units by 2007, betting on a second-half market acceleration.

And he expected GM's China sales to rise more than 20 percent this year to above 590,000 vehicles, from 492,014 in 2004.

VW sees its 2005 sales rising a mere 3-4 percent to about 680,000 units.

To combat margin erosion, Wale expected to exploit economies of scale as GM expanded, and to buy more parts locally. Up to 80 percent of a Buick sedan is already made from local components.

There's room for further price cuts. GM sells a Chinese-made Cadillac SUV for 688,000 yuan ($83,130), more than double the U.S. retail price.

Automotive Resources Asia expects the number of cars sold at less than $12,000 — including GM's popular Chevrolet Sail and Spark sedans — to comprise 45 percent of the Chinese market this year, up sharply from 24 percent in 2003.

Both GM and VW have focused on the economy-sized car segment in the past two years, hoping to reach China's growing ranks of salaried middle-class as they increasingly get behind the wheel.

"Most prices have stabilized to a large degree," Wale said.

"Having said that, the competition always has the ability and the option to change their pricing. And we will compete at the market price."

($1=8.276 yuan)