A GM-Renault-Nissan partnership would put GM in a good position to keep its tenuous market lead in China and compete on a global level with Toyota—if the new company sheds the detritus of old Detroit and its gas guzzlers for the U.S. market and looks toward the global market of the future. It will have formidable competition from Toyota, which is poised to surpass GM as the largest carmaker in the world either this year or next, when its annual worldwide production reaches 9 million for the first time.

After six years of record profits and admirable sales growth, Toyota’s market capitalization is some $200 billion; more than GM and Ford combined. Toyota also has a mountain of ready cash—more than $30 billion. It is that cash horde that will make it possible for Toyota to invest in leading-edge technologies that will help it achieve its goal of growing its global market share to 15 percent by 2010 from its current 12 percent. Toyota USA Executive Vice President Jim Lentz says the company will spend an average of $22 million a day on R&D and capital expenditures over the next year, aiming its money at future products and factories.

As if Toyota’s recent success were not enough, the company and other Japanese carmakers seem poised to take advantage of another impending market shift. The Chinese government has launched a new initiative to encourage the use of hybrid vehicles. With so many different fuel-efficient technologies being tested, the technology that becomes the standard is largely dependent on the solutions the giant emerging markets of China and India choose to embrace. If China were to decide upon using hydrogen-powered vehicles, or electric ones, the rest of the world would rush to build cars accordingly. Toyota and other Japanese companies are already well ahead of their competitors in their ability to jump in with the technology these new markets demand.

The fact that Toyota became the hybrid leader with its Prius—while most other automakers were pooh-poohing the marketability and profitability of hybrids—gives the company another competitive edge among Prius owners in the West, who have expressed strong brand-loyalty in surveys. While skeptical competitors question the profitability of hybrids, Toyota officials maintain that they are making money on these vehicles. Certainly as hybrid sales continue to grow, economies of scale are kicking in and lowering costs. At the same time, Toyota engineers, marketers and dealers are gaining unprecedented hybrid experience that should hold them in good stead for future high-tech car developments, including those with fuel cells. Toyota now has hundreds of patents on hybrid technology and is racing ahead with hybrids in China as well, with hopes of selling 3,000 Priuses in China this year. While Volkswagen and GM have just begun looking into hybrid assembly ventures with Chinese partners, Toyota has a deal with one of China’s biggest carmakers, FAW, to start assembling the Prius in Changchun this December. This will mark the first time the Prius has been assembled outside of Japan.

Honda, too, will become a serious challenger in the emerging markets. The company recently boosted its research and development budget to a record level, and its engineers seem determined to create an engine that uses more than the 15 to 18 percent of the energy that is now available in a gallon of gasoline. Research continues there into how to make internal combustion engines more efficient by reducing friction losses. Meanwhile, Honda is the only automaker with a working fuel-cell car, valued at $1 million, now being driven by an American couple, Jon and Sandy Spallino of Redondo Beach, Calif., to test the real-world driving experience. (Other automakers have provided experimental fuel-cell vehicles to universities and corporations for evaluation.)

A reasonable probability exists, of course, that as automotive leaders move into China, some of the future Chinese-foreign joint-ventures will hire engineers who develop technological expertise that they eventually—in another 10 years or so—use at wholly owned Chinese manufacturing companies. Even now Bricklin is bucking for Chery to produce a hybrid gas-electric car. With his typical swagger, he predicts that Chery will develop a car that offers a better combination of speed and mileage than anything else on the road today. That, too, will take a while.

Ann Job is a veteran automotive journalist and a test driver for the Associated Press and MSN Autos.