According to the study, China's top 100 suppliers command only around 50 percent of the industry's total market share, well below the norm in most other auto-producing countries.

China had more than 5,402 registered auto parts makers by the end of last year, with 74 percent having annual revenue less than US$10 million.

There is also massive overcapacity in the industry, which will lead to enormous pressure on cost and profit for auto-parts makers, according to Ivo Naumann, managing director at AlixPartners and head of the Shanghai office.

All these pressures will lead to mergers and acquisitions among domestic and international players, helping them reverse declining profits and survive competition.

A survey of senior executives at domestic Chinese suppliers from the AlixPartners study showed that most reported lower profitability in 2007 than three years prior, and 67 percent said they expect to see further shrinkage over the next three years.

"The Chinese auto-parts industry has reached a day of reckoning," said Stefano Aversa, co-president of AlixPartners and also one of the firm's top auto experts.

"On the one hand, it's an extremely promising industry with high growth potential for years to come. But on the other, this industry and those with a stake in it have some hard choices to make, and they must be made rather quickly."

Ninety percent of the executives interviewed by AlixPartners said they are planning some sort of M&A actions in the near future, with more than half of them saying they are also considering international acquisitions.

Gaining greater access to technology and R&D was the top reason for potential M&A deals, followed by access to sales channels and customers, and access to management skills.