Su Bo, an official from the State Economic and Trade Commission (SETC), said carmakers in China face more pressure in earning profits due to an increase in vehicle imports.

"It is impossible for local automakers to keep lofty profit margins since they have to slash the prices of their products to compete with imported vehicles," Su said over the weekend.

According to the SETC, profits of 15 key automakers in China totalled US$960 million yuan (US$116.1 million) during the first two months of this year, a 21.8 per cent decrease from the year before.

Among the 15 key automakers, there were still four loss-making companies, the report said. Their loss amounted to 360 million yuan (US$43 million) during the first two months of this year.

A SETC report attributed the profit drop largely to price cuts made by carmakers. Local carmakers, including Tianjin Automotive Industry Corp and Shanghai General Motors (GM) and First Automotive Works (FAW), have waged more than 10 price cuts beginning from the end of last year.

A bigger wave of auto imports is forecast to begin next month. China imported 9,500 vehicles in the first two months of this year.

However, some carmakers, such as Shanghai GM and the Changchun-based FAW, said their profits were not affected by their price cuts thanks to their robust growth in sales.

Shanghai GM said its sales during the first quarter increased to 2.65 billion yuan (US$320.4 million) from 1.65 billion yuan (US$199.5 million) in the same period of last year.

Feng Fei, an analyst from the Development Research Centre under the State Council, China's cabinet, said the profit drop was "very normal" following price cuts of carmakers driven by increasing imports because their profit margins were too high before as a result of a lack of competition in the industry.

Currently, the average profit margin of carmakers in China remains above 10 per cent, compared with less than 6 per cent of those in developed countries, according to Feng.

Their profits would further shrink amid competition fuelled by import increases, new product launches in China and more investors to be permitted into the auto industry, Feng said.

"We can expect to see a shake-up in the auto industry in China and many less competitive companies could fall flat or could be merged by big counterparts in the near future," he said.

The competitiveness of the industry as a whole would be ultimately improved based on the shake-up, he said.

At present, there are 118 automakers in China. Last year, they manufactured around 2.3 million vehicles.

Sources in the industry say the FAW is in merger talks with the struggling Tianjin auto firm, which cut prices of its Xiali cars by up to 20 per cent in January.

Su said the government hoped to see a reshuffle in the auto industry but the impact of increasing imports this year "will not be fatal" to local automakers because the government would control the imports of vehicles with less than 3.0-litre engines.

Such vehicle imports pose the biggest threat against home made models.

In January, China cut the tariffs on imported cars of less than 3 litres to 43.8 per cent from 70 per cent and to 50.7 per cent from 80 per cent for cars with smaller engines. Under WTO obligations, the tariffs will decline to 25 per cent by mid-2006.