China has been focusing on the development of its core industries including automobile that has become the world’s largest vehicle manufacturer, contributing a major portion to the growth of national as well as global economy. Yet, despite the extra ordinary development, the Chinese automobile industry faces threefold challenge, which if not handled properly may lead to undesired results, i.e. lack of independent innovation, a weak system of Intellectual Property Management, and, the continuous environmental degradation, for which the automobile industry is seen as a major contributor. This work aims at addressing these three problems and proposes the development of an Intellectual Property Based Industrial Innovation System for the Chinese Automobile Industry. Such a system would involve the Chinese domestic automobile companies (willingly) to work together side by side with the governmental bodies, academic institutes, and the customers to realize future oriented, continuous, environmental friendly and most importantly independent innovation.