Car shows, as a rule, are as long on China optimism as they are on razzmatazz. As new models start to hit the streets ahead of next week’s Geneva show, the industry is taking heart from a spectacular January in China, where annualised passenger car sales rose more than 50 per cent.

That is unsustainable. The January leap is partly technical, coming off a low base and possibly reflecting inventory distortions. Overall, carmakers are pencilling in 15-25 per cent growth this year. One swing factor is the expected turnround on rules restricting car usage in some 80 big cities. A blanket reversal of policy, already adopted in Shanghai, would encourage more motorists.

Even in the fast lane, however, sales will struggle to keep pace with production. Figures compiled by JPMorgan suggest a 38 per cent year-on-year rise in production. Even assuming that some of that fails to materialise, oversupply will continue to dog the industry. There are also more carmakers jostling for showroom space. Local manufacturers are finally giving the big international players a run for their money, clawing back market share from the likes of Europe’s Volkswagen.

Other old hands, including General Motors with its 11 per cent market share, face a fresh onslaught of competition from Japanese and Korean carmakers. Toyota’s Camry launch in May will be one test point. Another will be carmakers’ ability to withstand further compression of margins: escalating competition and new model launches point to another round of discounting. Smaller cars, now the most popular vehicles, have correspondingly smaller margins. And profits are already sliding – to the tune of 60 per cent last year, according to some industry estimates. Investors should drive carefully – and pay limited credence to the words of car salesmen.

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