Global suppliers see little competitive threat from Chinese companies, but it may be time for international parts makers to show some concern.
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The rapid growth of vehicle sales in China is strengthening homegrown suppliers, too.
Most high tech exports from China are from foreign-owned companies. The conventional wisdom is that locally-owned Chinese suppliers are competitive mainly in labour intensive components – many of which cannot economically be shipped around the world.
Productivity at Chinese plants has been poor. Only recently have some suppliers been able to claim that quality has reached internationally competitive levels.
But price competition could give the locals an edge.
Despite the volume growth in China, competition is likely to become tougher as the gap narrows between demand and local production.
The sheer number of OEMs and suppliers entering the market will put pressure on vehicle prices and, by extension, component prices.
Local suppliers are at a competitive disadvantage. Many of the sourcing decisions that drive the installation of components in cars built in China are made overseas.
“You need links to centres like Wolfsburg to be able to get your products through,” says one supplier executive. “Local suppliers would always struggle with that.”
The Chinese government has apparently decided to use international suppliers to build up a competitive local manufacturing base. Already a few suppliers – such as engine and brake component specialist ASIMCO – are developing real competitive strengths.
A handful of Chinese suppliers are almost world class, according to international rivals.
And as Chinese makes such as Tianjin, Chery and Geely grow and reach volumes of up to several hundred thousand cars, the advantage will move to local suppliers who are closer to the emerging manufacturers and have more common interests.
The new vehicle manufacturers in the country will also look hard at the local supplier base to develop a competitive advantage. They will work to expand the range of components in which Chinese suppliers are internationally competitive.
Meanwhile, the Chinese are looking to acquire technology fast. The leakage from international companies to their local partners is significant – and there are few effective measures to stop them.
Car companies have struggled to preserve their intellectual capital. It may be even harder for international suppliers who have less power and can be supplanted by another technology provider in the country. Like car companies they are scared of being locked out.
Meanwhile, Chinese suppliers are able to generate cash from their domestic market. In addition, the equity of quoted Chinese suppliers is some of the most valuable paper in the market today given the domestic growth story they can tell investors.
The long-term potential of the Chinese market gives local suppliers the power to acquire technology abroad. A Chinese company has been bidding for Peguform, a leading German bumper and trim supplier.
The interest in Peguform shows a smart eye for key technology.
Even if it is not successful at the first attempt, only an end to the China boom can stop the local industry from making a huge leap forward and emerging as a significant global competitor to the industry leaders within a relatively short time.
SupplierBusiness.com
