Part of the reason is that, despite the American perception of China as an economy dominated by exports, it's a country the size of the continental US, and that huge domestic expanse is peopled by 1.3 billion would-be consumers. The Chinese government is determined that they will be consumers. To make that happen, the government is providing plenty of domestic stimulus, unhindered (at least in comparative terms) by domestic banking problems, and with little of the pointless tax cuts and other fluff that bolstered the price tag of the "stimulus" package passed in the US. The ongoing construction of a national highway system provides plenty of room to speed things up (reversing the policy stance of a year ago, when the fear was inflation).
There are also vehicle-specific policies with bigger environmental implications than the US program that gets rid of a few seldom-driven1 "clunkers." Their tax breaks and and scrappage incentives (that include provisions to help rid rural roads of smoke-belching 3-wheelers), was implemented in a timely manner in January 2009. The focus is small vehicles, those with under 1600cc engines, with no loopholes to subsidize the purchase of trucks (unlike the US "clunkers" program). And if you visit Shanghai or Suzhou, while you'll find the roads filled with scooters and motorized bikes, the noise level is a fraction of what it used to be: they're electric, driven by batteries. The garages of condos include outlets to plug them in at night, enough to power the daily commute. But diesel fuel in China is still sulfur-laden, so the next-best alternative, a clean-diesel powered vehicle, is not yet an option there -- as was the case until two years ago in the US. So China can't (yet) follow the European option of small, clean and very-long-lived diesel powered cars.
Now the China market is profitable for the moment, and important to global firms. GM has actually shifted its international operations HQ to Shanghai, anticipating its sales there to top 1 million units in the near future; VW already sells over 1.0 million units a year. Accordingly everyone is pouring on capacity and dealers.
This may be a "bubble" of sorts. Already the shift towards smaller vehicles makes it less of a gold mine than a year ago on a per-vehicle basis. Meanwhile, the number of players is mind-boggling: not only are all of the major international players in the market (VW and GM have the top two spots) but there are still 80 local players. Yes, 80 -- because local governments support their "favorite son" firms. If you visit China, watch how the make of taxis varies as you move from city to city. The government is pushing for consolidation, and a couple of the bigger players have bought up a couple small ones. Others have quietly exited. But consolidation has been policy for years and years, and still there are 80 firms! Unless push comes to shove, Beijing has all too little clout at the local level, and this is just one example.
Lots of players ultimately means little profit. GM, Toyota and their rivals are jointly placing a big bet that that does not happen until they've been able to recoup their investment. However, that's a game of "chicken" and at the moment no one wants to blink and ease off on the throttle. I smell a bloodbath in the making, red ink puddled all over balance sheets. That may be 3 years away, but it will happen.
Meanwhile lots of incumbents remain due to (local) government largesse. A couple will turn out to have been well run and innovative, though at present they are still woefully lacking in engineering sophistication. In the background Beijing -- not the locals -- is making a big push towards electric vehicles; ditto battery technology. So a few local firms are likely to focus on electric vehicles (not nightmarishly complex hybrids), and in a market where drivers don't expect to go hundreds of kilometers at a stretch, there will be a local market (unlike in the US). The transition in drivetrain technologies may allow a couple global players to emerge out of the current plethora of small, high-cost producers.
Note that this has strong parallels with the Japanese case. There government policy also pushed for consolidation, and it also failed to accomplish that. Now the early post-WWII market did have about 30 players, and without local government support [Japan's is not a decentralized political system] or other deep pockets half of them soon exited; Toyota and Nissan both picked up with an extra factory or two in the process. The bottom line however was a market with a dozen firms, no dominant firm or even a "Big Three" that could mute competition. In Japan, it was improve efficiency or fail, and in the end that gave birth to Honda and Toyota.2 Japan's auto industry succeeded because industrial policy failed; the same, I suspect, will prove the case in China.3
1. Unfortunately the mandatory "CARS" survey that is part of the US "clunkers" program doesn't ask how many vehicles were owned. It does ask how many miles were driven the previous year -- as far as I can tell, no data from that question are yet available. Not surprising: most dealers haven't been able to get their "clunker" deals approved, much less gotten a check.
2. There are of course other Japanese firms, but only Honda, Toyota and Suzuki remain autonomous. Nissan is controlled by Renault, Mazda is de facto controlled by Ford, Fuso is owned by Daimler, Nissan Diesel by Volvo Truck, Toyota has purchased Hino and Daihatsu outright and has a large stake in Subaru/Fuji Heavy and Isuzu, and MMC has survived through the inexplicable largesse of its creditors and of Mitsubishi Heavy Industries.
3. I have only cursory knowledge of India. In contrast, I began studying about China in 1971, and while I ultimately became a Japan expert (more practical at the time), I've followed (and taught a course on) the Chinese economy for over 20 years, and have visited the country repeatedly.