Japanese automaker Mazda has signed a sales agreement with China's First Auto Works.

Mazda plans to sell 300,000 vehicles in China by 2010 through the deal with First Auto Works (FAW) and its subsidiary FAW Car. However, with the Chinese economy booming a little less than it was a few months ago, the road ahead may not be as smooth as Mazda hopes.

Mazda, which is one-third owned by Ford, has been granted permission by the Beijing authorities to set up a joint sales firm in China with FAW. The new business will aim to sell 300,000 vehicles in China by 2010, representing a sharp increase of Mazda's current car sales in the country which amounted to just over 97,000 in 2004.

The new company, which will sell cars produced by Mazda's joint venture with Changan Automotive Group and Ford, will be capitalized at $US12 million, of which FAW Car Co will take a 70% share. A further 25% will go to Mazda, with the remaining 5% belonging to FAW. The general management of the company will be undertaken by Mazda.

However, Mazda would do well to be cautious about the prospects of the Chinese auto sector. Beijing has been tightening monetary policy due to fears that the economy will overheat, resulting in a weakening of demand. There are already visible signs that supply of cars on the Chinese market is outstripping demand.

The weakened demand for cars is pitting US, European and Japanese manufacturers against each other, resulting in lower prices. It is thought that Toyota Motor has had to reduce prices for its Chinese passenger cars by up to 20%. BMW has also cut the price of five Chinese-made sedan models by 13%-14%.

With price cuts and falling sales, Mazda's plans to sell 300 000 vehicles in China by 2010 may be optimistic, especially given the levels of competition from other producers. Nevertheless, it would be equally rash to conclude that Mazda's overall strategy is flawed. Today, a significant presence in what could be the world's largest economy by 2030 is vital for all large car manufacturers.

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