China's auto-supply industry, facing new challenges including mounting costs, is expected to see dramatic consolidation in the near future, according to the latest industry study.

Despite impressive growth and profitability over the past few years thanks to the booming car market, domestic auto-parts suppliers also encountered problems that threaten profits, said global consulting firm AlixPartners.

The Chinese auto-parts industry, to date, has outperformed even Chinese auto makers with a compound annual revenue growth rate (CAGR) of almost 31 percent from 2004 to 2007.

They also achieved an average net profit in 2007 of seven percent, versus a net margin of 4.5 percent for Chinese auto makers, the study found.

The fast-growing light-vehicle market in China is also on track to achieve a CAGR of 15 percent between now and 2011, on top of an average annual growth of 19 percent since 2003.

But the yuan's appreciation against the US dollar and other currencies, along with the reduction in China's value-add-tax rebates for auto-parts exports, not only contributed to the increasing costs for energy and raw materials but also make it more expensive for exports, said the report.

Such costs can't be easily passed on to customers because the market is so competitive.

Exports now account for 14 percent of total annual sales for Chinese suppliers, representing a 35-percent CAGR since 2003.

The impact of the VAT change and the yuan appreciation could increase the cost of many Chinese auto-parts exports by more than 10 percent this year, said the study.

On the other hand, the industry is also highly fragmented and a growing number of overseas giants are establishing more wholly-owned subsidiaries in China, blocking the access for Chinese car makers to acquire advanced technologies through previous joint ventures and licensing agreements.