In 2006, official Chinese data stated that China had 6,322 automotive enterprises, divided into five sectors: motor vehicle manufacturing, vehicle refitting, motorcycle production, auto engine production and auto parts manufacturing. This included more than 4,000 auto parts and accessories companies, of which around half are very small companies.
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The bulk of these companies’ business is linked to the booming sales of the domestic manufacturers. Nearly 80% of the revenue for the auto parts and accessories market is from OEM supply for new vehicle manufacturing.
Most component suppliers are small and medium size companies-only about 2% of companies have sales exceeding US$10m per year, and only 6% have sales above US$100m per year. Even these larger companies are minnows compared with the global Tier 1s, whose turnover is measured in billions of dollars.
Research and development (R&D) capabilities among Chinese components companies are very weak, with many spending less than 2% of their budget on R&D, compared to a typical figure of 5-10% among foreign companies.
Estimating the value of the Chinese components industry is not easy due to the sprawling scale of the market, the proliferation of grey market components and the rapid growth rate. A 2005 report by BCC Research, entitled China’s Role in the World Auto Components Market, estimated the Chinese automotive components industry to be worth US$28.8bn in 2004, growing to US$58bn by 2009 at an average annual rate of 15%.
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By GlobalDataA separate study by the US Department of Commerce (DoC) suggests that the BCC estimate is accurate. The US DoC claims that China’s automotive component market was estimated to be worth US$46bn in 2006. This still makes China a relatively small player in global terms – only around 3.8% of the estimated US$1.2tn global components industry.
Meanwhile, the growth forecast of 15% is supported by official Chinese data. The China Association of Automotive Manufacturers estimates average annual growth rates in five main component categories are 13.4% for both body and general parts; 14.3% for chassis parts; 15% for engine parts and 20% for electrical systems. China’s automotive components industry grew at an even faster rate (23.7% per year) between 1995 and 2003, albeit from a smaller base.
The DoC defines the market’s main dynamics as follows:
- Increasing price pressure from OEMs – both from declining prices as
well as from rising material costs;
- Localisation of parts sourcing – OEMs localisation will trickle down to Tier 2 and 3 suppliers;
- Intensifying competition – more foreign entrants and improving Chinese suppliers;
- Consolidation – increasing M&A activity, especially among Chinese manufacturers; and
- Growing aftermarket – seen as a good source of profit, given price pressure in OEM market.
Some conclusions
China is still the land of opportunity for the global auto industry – for vehicle makers and component companies alike. But it is also fraught with problems, and although labour costs are still the lowest on offer, China perhaps does not represent the best option for companies looking to source from low-cost countries.
It’s difficult to export to China. Taxes and duties are complex, and often illogical. China’s WTO commitments should have eliminated punitive duties on components imports. But the EU has been forced to take legal action to enforce these agreements at the highest level.
Sourcing from Chinese suppliers is also fraught with difficulties. Quality remains an issue – aside from the most basic mechanical parts, few Chinese companies have the R&D capability to engineer complex parts – though the larger local suppliers are starting to develop these skills. Some are even opening local offices in Europe and North America to help communications. In any case it would seem essential to have a representative office in China in order to keep closer contact with suppliers.
The issue of intellectual property rights also has not gone away. China may have moved past outright design piracy of entire cars, but design theft of components is still rife, appears to be culturally acceptable, and is almost impossible to police.
And despite the low labour costs, other Chinese costs are not so advantageous. Raw materials can be cheaper – or they can be more expensive. And logistics infrastructure is poor, so the supply chain can be long, expensive and prone to hold-ups. This requires extra buffer stocks of parts in order to provide a safety net against disruption – further costs in terms of warehousing and inventory that needs to be factored in.
So from a low-cost sourcing point of view, China’s cost advantages are perhaps not as great as they are generally perceived to be. One can find greater cultural empathy from sourcing in, say, India, where English is spoken and IPR is respected, or Eastern Europe, where supply lines are that much shorter and technical expertise is greater. Any slight cost premiums from these regions must be weighed against the increased risk of sourcing from China through detailed risk assessment.
Clearly, a commitment to do business with China is not to be taken lightly. But the evidence is there that companies that make serious commitments to the market will reap the rewards. Large global Tier 1 suppliers have invested heavily in China since the early 1990s, and the critical mass they have built through JVs and wholly-owned operations is now paying dividends.
The Chinese new car market is growing at a rapid pace, especially through the growth of independent Chinese vehicle makers such as Geely, Chery, Brilliance and Great Wall. These companies have tended to buy cheaper components from smaller Chinese suppliers, but as Chinese consumers are demanding better quality – and as these companies look to export their cars – they are increasingly seeking the high-quality systems and modules that only the global Tier 1s can provide.
So the likes of Bosch, Delphi, Denso, Valeo and Visteon are now winning new clients in addition to the Sino-foreign JV vehicle makers around which they built their business-entry strategies. Profitability is good for the Tier 1 operations in China, and investment is continuing. And as the components sector is not subject to the same restrictions as the auto manufacturing sector, it is possible to own 100% of your Chinese parts operations. Even so, many Western companies prefer JVs, believing a local partner can help speed local access and reduce the risk of IPR infringements.
Is there an optimum path for the components industry? Certainly components companies should not fear investing in China – there is immense local demand, especially for the sort of hi-tech products that the local suppliers so not have the skills to develop and build. Providing these ventures are closely managed, there is no reason why the products they produce should not be exportable.
But the market is still volatile, and any relationship with China requires a managed risk approach. There’s still more than a hint of the Wild West about this part of the Far East…
See also: The Chinese automotive components industry
