|
|
|
Menu Login Logout Register Change Password My Settings About Us 
|
 |
The Auto Parts Industry in China Is Set to Take Off In part I of my report on China I talked about the auto Industry in China and its rapid growth over the past ten years and the expectations for the future. The major Chinese automakers have benefited from the foreign investment made by the Japanese, American, European and Korean automakers. These larger Chinese automakers have clearly separated themselves from the smaller Chinese automakers. While the Chinese government may not get their wish to limit the number of indigenous companies to two or three, it is clear that the number will be less than one tenth of today's number of over one hundred and twenty. There is a similar trend of foreign auto parts investment in China and of consolidation of the domestic supply base. Once again the government is trying to direct this consolidation while at the same time trying to utilize the invisible hand of the market to ensure the competitiveness of the industry. Prior to China's entry into the WTO the Chinese government restricted the foreign ownership of auto parts companies and foreign investors were limited to no more than 50% ownership. They were also required to invest a fixed percentage of sales into R&D and both automakers and auto parts companies had to comply with local content requirements. The result of these regulations was a local auto parts industry that was not competitive in the global market.. When it became clear that China was going to enter the WTO and that rules regarding auto industry investment would be liberalized the foreign investment activity in the auto parts area took off. In June of 2001 China published its 10th Five-Year plan for the Development of the Automotive Industry. This Five-Year plan recognized the problems associated with the auto parts industry and outlined proposed actions to be taken to improve the competitiveness of the auto parts industry in China. For the past ten years investment in the auto parts industry has lagged that in rest of the auto industry. Less than 30% of investment in the auto sector went to the auto parts industry. The investment which did take place did so to comply with the local content provisions. With WTO these provisions are eliminated and companies will have to compete based on price and quality. The result of the local content requirements is and auto parts industry with too many auto parts companies with too little size and second class technology. Recognizing this the goal of the latest five year plan is to support those portions of the auto parts industry where China has a competitive advantage. To accomplish this the Five-Year plan seeks to undertake a number of actions. Among them are: 1) promote the consolidation of the auto parts industry by allocating resources to favored companies. 2) promote the development and use of new technology. 3) identify components with the greatest market potential and promote their development and utilization. 4) use the desire of foreign firms to produce and sell in China to the advantage of the Chinese parts makers in increasing their export opportunities. Support will go to those companies that already have the ability to produce in large quantities and are supplying the foreign automakers. The Chinese government will also assist those auto parts companies that produce labor-intensive parts (e.g. wire harnesses) and material-intensive parts (cast magnesium parts) where there is a comparative advantage in Chinese production. The Five-Year plan also singles out new components such as air bag systems, anti-lock brake systems, and catalytic converters for government assistance. Finally, the government aims to promote the development of component systems suppliers that are able to compete in the global market. As part of this they will also promote the development of supply chain systems where the systems supplier has its own network of smaller tier one and tier two suppliers. The result of all of these policies and programs is expected to be a lean and mean auto parts industry. The number of suppliers is expected to be reduced by 70% including the foreign joint ventures. These companies are expected to have world class technology and be competitive in the global market not just in China. Whereas today a Chinese auto parts company is likely to supply only one automaker or a few small automakers with a total annual production capacity of less than 100,000 units, the target is to have companies with more than one customer and annual parts production capacity of at least one-half million units. I believe it is the Chinese government's objective to have a cadre of companies similar to a Mando Machinery, Johnson Controls, or Denso. Given the advantages and dis-advantages of a Chinese home base the early Chinese mega-suppliers are likely to come from the following sectors: wire harness systems, casting suppliers, and exhaust system suppliers. There are advantages to manufacturing these products in China such as low labor costs, access to raw materials and less stringent environmental regulations, and growing market potential. Like Mexico in North America China also may become a regional or global source for engines due to the factors listed above. In some cases the future is already here or at least evident. In 1996 just six years ago the US imported from China auto parts valued at 711 million dollars. This made up 1.46 percent of total U.S. auto parts imports that year. In 2001 we imported 1.758 billion dollars from China. This accounted for 2.84 percent of our auto parts imports. In that five year span China moved from our eighth largest source of auto parts imports to our fifth largest. While these shifts in trade are amazing in their own right, when one looks at certain product categories an even more dramatic picture emerges. In 1998 we imported a little less than 8 million dollars worth of aluminum wheels from China. This was 2.4 percent of our total aluminum wheel imports. In 2001 that number increased to 75 million dollars or 13 percent of our aluminum wheel imports and moved China from our tenth largest source of aluminum wheels to our third largest. In fact for the first four months of 2002 China has passed both Canada and Mexico to become our largest supplier of aluminum wheels supplying over 18 percent of our imports. This surge in trade is a result of a surge in foreign investment in China and the licensing of foreign technology by Chinese firms. It is estimated that by 2001 there were more than 300 foreign auto parts suppliers with investments in China. Since that time scores of companies have announced new or expanded investments in China. While there are quite a few U.S. owned auto parts companies with operations in China, the biggest investors to date have been the Europeans. This year the Japanese have become the most active investors. The Japanese automakers have all put a great deal of pressure on their supply base to lower the price of their components and component systems. As a result of this price pressure many Japanese suppliers have announced new facilities in China. In the eAutoPortal news archives I found 14 articles (table 1) announcing new and/or expanded OE parts plants that were announced by Japanese auto parts companies. In most of these cases it was their first investment in China. Many of these companies mentioned that they were making the investment as a result of the pricing pressures from their customers. The others were investing to serve the automakers in China. With the level of investment in the Chinese auto parts industry increasing at a rapid rate it is highly likely that the U.S. auto parts industry will face increasing competition from China. The question for the U.S. supply base is how to proceed. I believe that for some an investment in China makes sense. Those companies with size and depth of management as well as potential customers in China should be there. Other companies that produce parts where China has a competitive advantage should also look for a presence in China or at least in another low cost country. For example, North American aluminum wheel suppliers have for the most part shunned Asia. Hayes Lemmerz with a small plant in Thailand is the only American aluminum wheel maker in Asia. Neither Superior, Alcoa, Amcast, or American Racing have wheel plants in Asia. It is only a matter of time before a company like Amcast or American Racing loses business to the low cost producers in China. If they are not already thinking about going there, they should start. If you are not a large company with a deep management, then China should be seen as a source of low cost components. China has over two thousand OE parts suppliers. Most do not have the capabilities of even our smaller suppliers. However, they could be a good source of intermediate goods such as raw castings or forgings. U.S. and Canadian companies should utilize their strengths in design, engineering, and marketing and utilize the Chinese strengths in manufacturing costs and the ability to maintain a workforce in jobs where the work environment is less than ideal. We will be monitoring the auto parts imports from China and reporting on them from time to time. We will also be following the investment activities in the China by both the automakers and the auto parts companies. |
|
About Us Contact Us Privacy Policy Recommend us to a Friend Copyright © 2010 ELM International, Inc. All Rights Reserved. |