Car manufacturers have grappled with the problem of overcapacity for many years. But, according to a new report, many of them are seriously underestimating the danger of making too many cars.

Industry analysts believe the global car market can absorb an overcapacity of 20 per cent and still remain profitable.

A survey by accountants KPMG showed that three out of four automakers believe their overcapacity problem is below this critical level.

But a survey carried out for KPMG shows this is not the case. It found global overcapacity to be running at about 25 per cent. If it is to reach 20 per cent, car makers will have to reduce production by four million units.

Yet all the signs indicate the opposite is happening.

In North America, where car makers have been forced to offer massive discounts to sell cars no one wants, Toyota has announced plans for more factories. Next month, the Japanese company is to open a factory in Mexico.

The new head of Mitsubishi Motors North America - the Japanese automaker facing the biggest problems - is also refusing to close factories.

Rich Gilligan described Mitsubishi's plant in central Illinois, as a critical part of the company's presence in the US.

"There are too many naysayers out there," he said, speaking at the North American International Auto Show, in Detroit.

There are signs, however, that Europeans are facing up to the future.

Paul Thomas, chief executive of Ford of Britain, said overcapacity was putting unwanted pressure on profitability.

Speaking at the launch of the new Focus, he said: "Good product is king. Overcapacity means a lot of marketing incentives. Margins are coming under pressure for everyone."

Another car company executive told The Guardian newspaper recently: "Companies are looking to sell customers finance. The last thing they want is someone coming in with hard cash.

"They want customers who will be borrowing money over three or four years."

Perhaps, wisely, he chose not to be named.

KPMG offers no prospect of an easy way out. Not even the vast Chinese market - tipped to be the second largest in the world within five years - can absorb the overcapacity.

Even worse, the report says some Chinese manufacturers may look to expand by exporting overseas - fuelling the overcapacity.

The industry has already seen the first signs of this. If Shanghai Auto's deal with MG-Rover goes ahead, some Chinese-built cars could eventually be sold in Europe or North America.

KPMG said this would pile further pressure on European brands, adding that globalisation meant there was now nowhere to hide.

"A bitter rival, once an ocean and an unfathomable cultural divide away, is now next door and bibbed for lunch - if at all possible, yours," warned the report.