Blog: Dave LeggettChina's fragmented supplier industry

Dave Leggett | 4 December 2003

There’s no sign yet of any significant slowdown in the Chinese vehicle market. Figures released by ARA indicate that the market in October was up 61% over a year earlier. The strong position of Volkswagen in the marketplace stands out – with both its Shanghai Volkswagen and FAW-VW operations.

That said, the market is still relatively fragmented between a multitude of brands. And market fragmentation remains a structural issue for the Chinese auto industry as a whole as it attempts to get internationally competitive. 

One interesting and rarely commented on feature of the Chinese auto industry is its strongly regional focus, something that has its roots in China’s regional rivalries and the political dimension that has figured strongly in China’s economic development. The rivalry between Shanghai and Beijing is probably the biggest – it transcends municipal, economic, political and cultural spheres.

Thus Volkswagen’s Chinese manufacturing operations don’t really talk to each other, let alone engage in practices like shared procurement or development costs. The supply bases are totally sewn up, as are the customer bases come to think of it. SAIC, for example, includes a huge network of suppliers (it’s a tangled web of cross-shareholdings) in and around Shanghai and it is accepted practice that SVW uses them. Other domestic vehicle makers are organised in a similarly highly vertically integrated manner and Western partners have been obliged to go along with these practices.

My gut feeling is that these things won’t change quickly and that they work against the exploitation of scale economies in China’s huge and fragmented automotive supplier industry. Will it be rationalised and consolidated on a more national basis one day? That’s actually quite a scary thought because it would mean even lower unit costs and make Chinese parts potentially even more attractive on the international market. Yikes.


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