European automakers should be careful how they invest in China's booming auto industry, said Steve Young, vice president, global automotive practice at A.T. Kearney.
Both automakers and suppliers can save 40 to 60 percent on production costs by locating in China, and the sales potential for China is huge, he said.
"By 2015, China will have half of the middle-income population in the world," Young said. "But OEMs may face competition from China, which may over time be become a bigger car producer than Brazil."
One challenge for foreign investors is timing how it builds local operations to avoid having too much unused capacity.
"A huge and sudden investment may otherwise be under used," Young said.
Another challenge for foreign carmakers and suppliers creating joint ventures with local Chinese investors is safeguarding intellectual property.
"That has happened before between GM and Daewoo when the Koreans started to produce GM models," Young said. "In that respect, China is a safer place for suppliers."
The Chinese government also prefers European and US-based carmakers to Japanese automakers, he said.
"Their reasoning is that they have less control over the Japanese because they are so close geographically," Young said, who added that India may become the next place for an emerging car industry.
He said: "Like China, the country is large and poor but with a rapid growing middle class."