European and US suppliers are still rushing to China, driven by low manufacturing costs and the country’s vast potential.
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But auto partsmakers are entering a more competitive marketplace than just a year ago. A shake-out of suppliers in China is inevitable, say executives and consultants.
Within five years, “more than 20% of suppliers” will fail, Keith Lomason, executive director of Magna International’s office in China, said at the Automotive News China Conference.
The shake-out will increase risks for suppliers entering China. Until now, the rapidly expanding market absorbed nearly all parts produced in the country. Now competition is creating a vicious cycle, prompting partsmakers already there to seek export opportunities. That is likely to further lower global parts prices and in turn pressure western suppliers to move to China.
“There is increasingly intense price pressure,” said Rudolf Colm, board member in charge of Asia-Pacific for supplier Robert Bosch of Germany.
The booming unit-sales growth in China has slowed from a 67% surge to two million units between 2002 and 2003 to a 15% increase to 2.3 million last year. In the first quarter of 2004, auto sales in China grew 45%. But analysts say sales this year will grow only about 10%, perhaps 15%.
That’s still a healthy rate by European standards, but various forces are draining profits out of China – more competition, price-cutting and a consumer swing to cheaper cars.
Chinese consumers are buying low-margin small cars this year. In 2003, large cars such as the Buick Regal were part of the fastest growing segment in China, said Troy Clarke, president of General Motors Asia-Pacific. Then GM netted about $US3,500 (€2,700) per Regal, said consultant Michael Dunne, president of consultancy Automotive Resources Asia.
But this year small cars, such as the Chery QQ priced as low as $4,000 are the hottest sellers, Clarke said.
Competition has intensified as automakers rush fresh products to market and slash retail prices. From 95 light vehicle models last year, 125 are available this year. In a market of 2.5 million units annually, an average of 20,000 sales per model is a profit challenge for even the hungriest Chinese automaker, Dunne said.
