Executives across the automotive industry may be under-estimating the extent of over-capacity within the industry, according to UK business advisory firm KPMG.

Its annual survey of senior automotive executives reveals a belief that global over-capacity is on the decrease. 75% of respondents claim that over-capacity is now less than 20%. Last year, only 63% felt that it was below that mark. However, KPMG feel that these responses are overly optimistic.

Although the numbers may be surprising, the responses relating to the Chinese marketplace look even more startling. Despite capacity being added at a rapid rate, 37% feel that there is no over-capacity at all in China, while a further 28% feel that it is below 10%.

Mike Steventon, head of automotive at KPMG UK, said: "While a number of vehicle manufacturers have commenced reorganisation programmes to address over-capacity, it is not yet clear whether these programmes will be substantial enough to bring supply and demand back into balance and to drive improved profitability. Based on our research, we view over-capacity as the most significant issue facing the sector and, in our opinion, the current level of over-capacity is higher than identified in the survey."

"We believe that the level of over-capacity is still around the 25% mark and to reduce this to 20% would involve the removal of over four million units' worth of capacity. The challenge of reducing capacity should not be under-estimated, particularly considering the substantial new investments being made in China. It is not just an issue of global over-capacity but having the right level of capacity in the right geographic location.

"In our most recent report on the Chinese industry, we noted that existing and committed capacity had grown rapidly while limited growth in sales was expected to be reported in 2004. Although we expect sales to grow in future years, over-capacity will remain a major issue for the next decade. Even with predicted sales of 3.1 million units in 2007, that would still mean that less than 60% of capacity would be utilised."

Elsewhere in the survey, optimism seems to be waning over European manufacturers' ability to grab global market share. Over the past three surveys, the number of respondents who believe that European brands' market share will decrease has risen from 9% in 2002 to 12% last year and up to 25% this time round. Looking at it another way, 75% of respondents still believe that market share will increase or at least remain the same but this is down from 89% in 2002.

The decline in optimism is unsurprising considering the irresistible rise of the Asian manufacturers. No longer merely an important player to contend with, Asian companies now represent the most decisive force in the global industry and a dynamic source of innovation, KPMG said. In addition, 78% of respondents agreed that consumers in Asia will become a major source of growth in the global demand for automobiles over the next five years. In this area, European brands can take some consolation in the fact that a quarter of respondents feel that they are most likely to succeed in China over the next five years, placing them ahead of the North American brands in this regard.

Steventon added: "The incredible strides being made by the Asian brands continues to impress. Our survey now shows that the expectations for Korean and Chinese brands to grow are enormous - albeit from a lowly starting position.

"Manufacturers have principally established operations in China to access the domestic market. However, the potential for China to export significant volumes, given projected future over-capacity, should not be under-estimated. The key challenge for Chinese vehicle manufacturers is to improve quality and drive down costs through a more integrated supplier infrastructure in order to enable it to commercially export vehicles."

Respondents also asserted their confidence that higher levels of profitability may materialise sooner rather than later. In every previous survey, most respondents have pointed three years ahead as the time when profitability would be at its peak. This year's survey is the first in which that trend has not been continued as respondents maintained that 2006 will still be the industry's most profitable year. A further 16% of respondents plumped for 2005.

Steventon said: "It's encouraging to see this belief amongst the survey respondents that more profitable times could be looming. However, it will be interesting to see how they plan to deliver that profitability. We recognise that a number of vehicle manufacturers are restructuring their activities to align with the changing marketplace. However, whether this restructuring and rationalisation will be sufficient to compensate for increased labour, metal and energy costs is still to be proven. In an environment where prices to consumers are not expected to increase, the industry must deliver on this."

Other key survey findings:

Some of the gloom surrounding the North American brands is lifting. 55% of respondents felt that their global market share would increase or remain the same - up from 42% in 2003.

When considering product categories, hybrids were named as the segment most likely to grab market share with 74% of respondents in agreement, driven by an apparent shift in North American consumer tastes.

The commonly held view of recent years that there would be rapid consolidation amongst the vehicle manufacturers now appears to be receding. However, a major shake-out is expected in China in the next five years with most people believing that only 4-6 foreign VMs will remain after that time.