After an extended period of 50%-plus annual growth, China recently surpassed the United States as the largest car market in the world. This is just the tip of the iceberg, as only 2% of the Chinese population owns cars. In other words, the market has vast potential to grow significantly bigger.

Given that the market is in its infancy, China has a unique opportunity to embrace newer and cleaner automotive technologies. This opening has not gone unnoticed by the Chinese government, which plans to fully seize on its ability to become a world leader in developing and growing the market for electric vehicles. Last August, it commissioned more than a dozen state-owned businesses to begin building electric vehicles and announced ambitious goals to have all public vehicles running on lithium-ion batteries or other non-gasoline sources within 10 years. All told, China plans to be the largest manufacturer of electric cars by the end of 2012.

The big winners from this initiative, aside from the Chinese environment, will be native Chinese firms, but the opportunity is so vast that leading automotive and vehicle companies around the world will get some of the spoils. U.S.-based Ener1 (NYSE: HEV) is one of them. The company develops lithium-ion batteries for vehicles and inked a deal with Wanxiang, one of the largest auto parts makers in China, in early January. The joint venture will produce batteries for heavy-duty vehicles, including public buses, semis and construction vehicles.

The government announced in June 2010 subsidies of about $9,000 for electric-powered taxi cabs and vehicles driven by local government authorities, along with billions in subsidies to help companies develop innovative technologies to bring production costs down, while increasing volume so that batteries and vehicles can be produced more cheaply.

At an investment conference I attended last week, Ener1 CEO Charles Gassenheimer described the electric-vehicle initiative in China as a $100 billion opportunity in the next decade. Gassenheimer said he believes the government is firmly committed to being No. 1 in terms of vehicles sold and possessing cutting-edge technologies.

Ener1 is also a big player in the U.S. electrical-vehicle market, as is A123 Systems (Nasdaq: AONE). In China, Wanxiang is privately held, but BYD Co. Ltd. (BYD.PK) is publicly traded in Hong Kong and specializes in rechargeable batteries, including nickel and lithium-ion batteries for mobile phones as well as automobiles. The fact that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) — at the urging of Buffett’s sidekick, Charlie Munger — is a large investor in BYD should provide yet another indication at how much upside potential exists by investing in the burgeoning market for electric vehicles in China. The move by Buffett, an investor who usually shuns technology and focuses on the U.S. market, further demonstrates the fact that the Chinese electric-vehicle market may be a once-in-a-lifetime investment opportunity.     

Action to Take —> As large as it sounds, this $100 billion opportunity is very likely to be far from exaggeration. The stakes are high for China, given it is already the second-largest consumer of oil (the United States is still the largest) and its environment already suffers from a reliance on the burning of pollutive coal to develop most of its electricity.

A very high percentage of Chinese have yet to own cars, but more and more they will be able to afford their first automobile as economic development continues. China is also unique in that it can build a market from scratch. In the United States, it is proving extremely difficult to shift tastes away from the combustible engine that was first produced on a massive scale by Ford (NYSE: F) when the Model T was rolled out in 1908.

I like Ener1’s chances in China, given the joint venture it recently entered and the fact that it can also become a profitable leader in the United States. 

P.S. —  I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…