Surging cost for raw materials have hit many Chinese manufacturers of auto parts, which are suffering declining profit and tougher competition.

However, it's not all bad news for suppliers. Although they face up to 10-percent profit cuts, it has prompted a flurry of consolidation among China's 5,000 registered auto parts companies.

More than 80 percent of executives are considering mergers and acquisitions, according to a survey from industry analyst AlixPartner. And more than half of them plan to look overseas.

"Auto parts manufacturers are much more influenced by the price hike because of their position in the forward part of the production chain," said Jane Ye, auto and infrastructure research analyst from consulting firm Cazenove Asia Limited.

"They are also pressured by auto makers to shoulder the additional cost to maintain vehicles' price competitiveness," Ye added.

The auto parts industry has traditionally enjoyed high profits as it has benefited from the global trend of outsourcing.

Galaxy Securities Co reported that China's auto parts industry had a compound annual growth of 31 percent in sales between 2004 and 2007.

But steel prices, which have increased from 5,000 yuan (US$725) per ton to 8,000 yuan per ton over the past few months, have left domestic makers deep in the red.

The rising yuan and lower tax rebates on exports are another two factors estimated to cut industry profit by 10 percent this year.

AlixPartner said in a separate research report China's top 12 auto parts makers have reported their profit declined significantly in 2007 from three years ago.

About 67 percent of senior executives surveyed estimated profit will fall further in the next three years.

The Chinese government is encouraging consolidation, realizing that the auto parts industry is much more fragmented than the complete vehicle segment. Many domestic car makers are still involved in low-tech content and low-value-added segments.