Chinese Auto-parts Exporters Turn in Stellar Performance in 2007

Bolstered by increasing procurement by international automakers, China exported some 30% more automotive parts, totaling about US$15 billion, in 2007, making the sector a star among the multitudes who play ever bigger roles in the nation's export business.

The stellar performance by the auto parts sector helped to buoy the streak of vigorous export growth, enabling the export figure to rise 6.6 times over the past five years.

The U.S. remained the largest buyer of China-made auto parts-absorbing over US$7 billion-making China the second largest supplier of such products shipped stateside, trailing Japan.

Japan was the second-largest export destination of China-made auto-parts, with other major outlets to include the European Union, Canada, Australia, South Korea, and South East Asia.

While China exported mostly after-market products with lower price tags, but its proportion of exports of higher-priced OEM (original equipment manufacturer) or OE (original equipment) products saw handsome growth.

In the first 11 months of 2007, for example, exports of China-made engines jumped an annual 46% to total US$1.05 billion.

Many major auto-parts makers have managed to become OE suppliers to international automakers, a move typically regarded as the first step to achieving economy-of-scale and then higher profitability that leads to perhaps ODM and OBM operations. Shandong Gold Phoenix Group, a leading Chinese brake maker, for instance, successfully joined the supply chain of PSA Peugeot Citron Group in March 2007; while Yizheng Shuang Huan Piston Ring Co., Ltd., a major piston maker, has joined the supply chain of Ford, PSA, and Hino, whose orders helped the piston maker achieve 40% export growth totaling some US$50 million in 2007.

Biggest in China also Presents Stateside

Wanxiang, the largest Chinese auto-parts maker with products such as driveline parts, drive-trains, and bearings, is now an OE supplier to the three leading U.S. automakers, General Motor, Ford, and Chrysler. Its Chicago-based Wanxiang American Company now runs 19 subsidiaries, with the company becoming in July 2007 the largest shareholder of A1, OE supplier of auto modules and logistics operator for the three U.S. automakers. Total revenue for Wanxiang's overseas operations, including those in the U.S., Europe, and Latin America, is estimated to have totaled some 60 billion yuan in 2007.

Auto parts exporters in China ship virtually everything from headlight lenses to rear-bumpers, with some of the main products to include auto air conditioners, lights and signals, electronic devices and gauges, accessories and parts, brakes, accelerators, transmissions, drive axles, wheels, suspension systems, clutches, steering wheels, and air compressors.

With no apparent geographical pattern, the auto parts export bases in China are scattered across five locations: Shandong, Zhejiang, Shanghai, Jiangsu, and Guangdong.

One major factor driving the brisk growth of the Chinese auto parts sector is the rising procurement of China-made products by global automakers, which is likely to cut production costs amid the increasingly competitive international market. Such trend is especially true for most of the brands competing not on top-end quality and technology but on popular pricing, relatively easier upkeep, affordable replacement parts, etc. One marque not in this group is Toyota, the premium Japanese make, who has so far chosen to keep its China-based operations modest; while GM, the American make known for popular-priced cars, has set up a major operation in China, with all-American Buicks reportedly selling better in China than even back home.

China, for instance, has been a major supplier of peripheral and auto electronics products to General Motors, which also procures from the country via 198 subcontractors a wide range of other parts, mainly forged and cast parts, as well as and plastic products, with such parts feeding the production lines not only in GM's Chinese factories, but also those in other countries.

GM Steps Up Ops in China

Bo Anderson, chief of GM's global procurement, notes that the world's biggest corporate captain will raise its China-based procurements annually by 25% throughout 2005-2010. And that GM's procurement operation will move a giant step forward following the inauguration of its US$250 million R&D center in Shanghai by May 2009, whose projected 1,500 engineers will work on developing alternate fuels, as well as help the procurement operation, including teaming with local suppliers to develop new parts and quality testing the same.

In 2006, Ford procured 20 billion yuan of auto parts in China, with Volkswagen, the biggest carmaker in Europe, having bought some US$1 billion.

Departing from traditional practice and likely forced by market necessities, Japanese and Korean automakers, who have usually been patriotic in terms of keeping downstream supplier business at home, are outsourcing more auto parts to Chinese makers, in a bid to compete more effectively against American and European rivals. KIA Motor, for instance, bought 40% more auto parts from China in 2007, including a variety of relatively technologically-complex items such as engines, starters, and generators, which are supplied to the company's factories worldwide.

In Shanghai alone, multinationals have set up 200 auto-parts procurement offices, 80% of which by automakers and their first-tier suppliers.

In addition, major international auto-parts makers, such as Bosch of Germany and Lear of the U.S., have invested in over 500 enterprises in China, including in the forms of self-owned factories or joint ventures, which offer, often as byproduct of globalization, technological shot-in-the-arm for the Chinese auto industry as a whole.

Reports are that foreign-invested enterprises generate some 60% of auto-parts made-in-China shipped abroad.

Rising Affluence Fuels Growth

Meanwhile and with the rising level of affluence in China and the expected changing mindsets regarding consumerism and status symbolism, Chinese consumers are reportedly seeing car ownership as a must in personal achievement, hence contributing to the amazing growth in the industry turning out indigenous cars, which in turn fuels the auto aftermarket, all of which have helped to heat up the Chinese auto-parts sector at incredible pace in recent years. Chery Automotive, China's leading local-brand carmaker, runs 30 affiliated auto-parts enterprises capable of supplying key components, including engines and gearboxes, for in-house needs and other Chinese automakers. Moreover, it has signed an agreement with Fiat of Italy to supply the Italian carmaker, whose famed history is closely-linked to that of Alfa Romeos-sports-bred cars famous for carving deftly around bends and corners, 100,000 engines bearing its own ALTECO brand annually.

The Chinese auto-parts sector also owes its brisk growth in export, at least partly, to the considerable support offered by the authorities, which has designated the trade as one of those in China packing the most potential for export. In fact the Chinese government has been actively promoting auto-parts exports: In 2007, it named four municipalities "national auto and parts export base," including Guangzhou, Baoding, Hefei, and Liuzhou, boosting the number of the cities with such title to 12, which also include Changchun, Tianjin, Wuhan, Chongqing, Xiamen, Wuhu, and Taizhou; while the municipal governments of these cities are also playing a role in the export-promotional program-helping the sector by building dedicated industrial parks, offering tax incentives, financial support, and manpower.

The government has also endowed 160 auto and auto-parts enterprises the title of enterprise of "national auto and parts export bases."

Moreover, the government has been instituting various technological standards for auto parts to augment the industry's technological level. A number of auto-parts standards are scheduled for enactment in 2008, including powered auto windows, auto-window lifting motor, and anti-squeezing electronic module for powered auto window.

Blockades Ahead

There, however, lie a number of blockades on the road for the further development of the Chinese auto-parts industry. One is over-reliance on massive exports of parts with relative-low price tags, which have triggered over 10 anti-dumping cases in the past couple of years in various countries, including Canada, India, Egypt, European Union, Russia, Mexico, South Africa, the U.S., Peru, and Argentina, involving such items as fastener, windshield wiper, windshield, brake disk, and brake drum. In 2007, the EU, for instance, launched an anti-dumping investigation against Chinese fasteners.

In addition, the U.S. government has requested the Chinese government to sign an auto safety agreement, aiming to set up a quality threshold for Chinese auto parts shipped to the U.S.

Moreover, the Chinese auto-parts industry is encountering growing competition from makers in other developing countries, notably India and Vietnam, especially for products with lower price tags.

"Along with the increase in its labor cost, the Chinese auto-parts industry is facing challenge from other developing countries in terms of low-cost advantages. Vietnamese labor, for instance, costs only half of Chinese counterparts, with the former able to deliver competitive quantity and quality," remarks Nick Reil, vice president of GM's Asia-Pacific operation.

The auto-parts export sector in China is also having to cope with rising material costs and appreciation of renminbi.

In 2007, auto parts exporters contributed to a miniscule 1.5% of China's total export value, indicating that the road ahead for these players as they continue to link into the enormous supply chains in the auto industry will still be long, bumpy, one that calls for them to address some of the toughest issues, including those related to technology, ecology, market, raw material and manpower.