Global carmakers are currently falling over themselves to invest in production capacity in China. The Chinese vehicle market has vast growth potential and there is also growing interest in the possibilities that China presents for low-cost production for export. And now suppliers are following the OEMs. Chris Wright reports.
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Demand set to grow
By 2008, most forecasts suggest that China’s passenger car market will be more than three million units. Add in a healthy commercial vehicle market of about the same and there is potential for annual sales closer to six million. It’s a market people have been saying is going to take off for the past 10 years. Well, now it has. In the first seven months of 2003, the passenger car market grew by 76 percent to 1.1 million units compared to 2002. The year-end forecast is for sales of 1.9 million.
A survey by analysts Global Insight (formerly known as DRI) says that by 2007, passenger car production will overtake commercial vehicle production for the first time.
The market is dominated by Volkswagen with 35 percent of the market, split 21 percent Shanghai VW (SVW) and 15 percent First Auto Works-Volkswagen (FAW-VW). Shanghai General Motors is a third at 8 percent.
By 2008, VW will still dominate but SGM, maintaining an 8 percent market share, will come under pressure from Guangzhou Honda, also on 8 percent, and PSA Peugeot-Citroën’s joint venture DPCA (7 per cent) with First Auto Works Toyota and Dongfeng Nissan both predicted to take a 6 percent share of the market.
With such growth potential, some experts believe that China will see the rise of its own domestic carmaker before too long.
Supplier interest grows
All this is a very attractive proposition for suppliers. A rapidly growing domestic market and low labour costs. Some are already there, having taken an early decision to follow their customers from Europe and North America.
French supplier Valeo has already taken things a step further by establishing a technical centre in the country, recognising that vehicles need to be engineered in China, for China.
Valeo, which has 2,300 employees in China, will use its new technical centre, close to PSA’s joint venture in Wuhan, to develop advanced automotive lighting systems for both China and Europe..
The new technical centre will employ up to 120 engineers and technicians and is due for completion in 2004.
Thierry Morin, Valeo’s chairman and chief executive officer, said: “This investment is an important step in Valeo’s expansion to support the rapidly evolving Chinese market, an automotive market that is forecast to become the third largest in the world.”
“Our Shanghai Purchasing Office already enables Valeo’s worldwide divisions to source in China and now the new technical centre signals our intention to invest in the local development of technology and new product designs for a range of customers around the world.”
Valeo has been in China since 1994 and sales in the region have grown by around 30 percent annually and reached $230million in 2002.
Faurecia has followed Valeo and set up a purchasing office in Shanghai. The French seating supplier uses it to source parts for its operations in Europe and North America.
While there is concern in Europe and North America that jobs maybe lost to Chinese operations which will then ship components back, the long term view is that if the Chinese market continues to grow at its present rate, then suppliers will have their work cut out just to meet local demand.
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Low-cost to best-cost
There is also a view that China will quickly move from being a low-cost centre to a best-cost centre, with low cost operations moving to India, Vietnam and eventually Africa.
Delphi Corp’s Asia Pacific purchasing director Ong Koon Ling, said: “While quality is a given we also have to look at the whole value stream including transportation. If you are just looking for low cost then you are missing something.
“It is important we bring people up to the standards we expect and the standards expected of us.
“The best suppliers in China are either wholly foreign-owned or joint ventures with foreign companies. We’re working with local enterprises to bring them up to the same standards. We see this as an important step for the future.”
One of the other major challenges facing all Chinese-based suppliers is the constant price war. Jinya Chen, Delphi’s China president, said: “Ten years ago buying a car was a luxury. Now people want affordable, good cars and we must maintain the quality and the low price.
“We think we are a step ahead because we manage our supply chain starting with the raw material supplier even before goods get to our Tier 3 or 2 supplier. A defect rate of 6ppm means there is no tolerance – just one defect would put it far above that.
“The same products that we produce here go to North America and Europe without any modification and there aren’t many companies that can do that.”
China will remain a highly competitive market for years to come because of the potential size of its domestic market. Latest research suggests that by 2005, more than 42 million Chinese families will be in a position to afford a car, said Chen.
“Our domestic market is far more sustainable than, for example South Korea’s which was largely export driven. China is roughly the same size as the USA but with four times the population.”
Delphi, which exports about 20 per cent of its Chinese output, says it has been profitable for the last five years. It has around 4 per cent of the total Chinese components market, according to consulting firm KPMG. Together, Delphi, Bosch, Visteon and Denso account for 9 percent of the market.
To read more about developments in the Chinese automotive industry, see just-auto’s members’ management briefing, ‘The Chinese Car Market’.
