Taiwan Auto Parts Makers See Rosy Outlook for 2012

The global automotive industry has been mired in turbulence for several years, with the situation worsening in late 2008 when the global financial tsunami struck blows at almost every aspect of life. Despite a modest rebound, the industry is still facing challenges in the new year.

Year 2011: Growth
The year 2011 ended with signs of the global automotive industry's recovery from its coldest winter in many years. The national debt and other economic issues that struck the world in the fourth quarter muddied the outlook, however, and analysts are carefully watching developments as we move into 2012.

Global vehicle deliveries by Europe's largest carmaker, the Volkswagen Group, for example, registered respectable growth last year, scoring annual sales of over eight million vehicles for the first time. A total of 8.16 million Volkswagen-made vehicles were handed over to customers worldwide during the year, up 14.3% over 2010. This was much better than the 5.1% growth for the global industry as a whole.

Deliveries were also up for the luxury car segment. Porsche AG, a German maker of high-end sport cars, set a new record in 2011 by selling 118,867 vehicles worldwide, a 22.2% increase compared with the year before. This was substantially better than the company's target of 100,000 deliveries for the year.

We hope such growth can continue, of course, but many uncertainties lie ahead.

The global demand for aftermarket (AM) auto parts, according to available data, did not suffer too heavy an impact from the recession, partly because the serious snowstorms in Europe and North America stimulated demand. The global auto-parts aftermarket seldom shrinks, in fact, because auto ownership continues growing in response to high sales volumes in emerging markets.

As a result, all signs are pointing to improved opportunities for Taiwan's auto-parts makers, who supply a major share of the world's high-quality, reasonably priced aftermarket (AM) auto parts. The industry has long depended on exports because of the limited size of the domestic auto market (about 360,000 new cars sold in 2011). In addition to supplying the aftermarket, local manufacturers are muscling into the more lucrative original equipment (OE) segment and seeking stronger footholds in the supply chains of international auto brands.

The continuing demand for replacement parts kept most of Taiwan's AM auto-parts suppliers safe during the recession, and some of them have even announced aggressive capacity expansion projects. They will further benefit from the recent global upturn in new-car sales.

Another force driving global demand for AM parts is climate change. With extreme weather increasing everywhere—frequent flooding, unusually low temperatures, unprecedented amounts of snowfall, torrential rains—accidents have increased, bringing extra demand for parts—especially collision replacement parts.

Most AM parts makers in Taiwan reported good sales in the first three quarters of 2011, implying that they were not affected by the financial woes of the U.S. and Europe. During that nine-month period, according to Taiwan Transportation Vehicle Manufacturers' Association (TTVMA), Taiwan exported NT$135 billion (US$4.5 billion) worth of auto parts, a 6% increase from the same period of 2010. The expectation of continued strong demand is driving some world-leading Taiwanese parts makers to further expand their business deployment.

The island's auto-parts makers are eyeing a high-potential future across the Taiwan Strait. Their optimism was bolstered by the third annual 2011 Cross-Strait Automotive Industrial Cooperation and Exchange Meeting, organized by TTVMA, the Taiwan Automotive Research Consortium (TARC), and the China Association of Automobile Manufacturers (CAAM), which was held in Taiwan in the third quarter of last year.

The meeting was attended by variety of industry and academic representatives, including Wang Fuchang, Deputy Director of China's Ministry of industry and Information Technology; Dong Yang, executive vice chairman and secretary general of CAAM; Cheng Guo-rong, TTVMA chairman; and over 400 delegates from makers of assembled vehicles, parts, automotive electronics, and other related products.

Four cooperative memoranda of understanding (MOUs) were signed during the meeting, covering the fields of electric buses, telematics and intelligent public buses, active vehicular safety systems, and special-purpose vehicles.

Industry sources say that while China has a massive assembled-vehicle industry and huge market, it lacks a strong capability for the development of key parts and components. Taiwan's globally famous information and communication technology (ICT) industry, and the abundant experience and know-how of local companies in automotive-electronics development and production, have fueled the growth of the local auto-parts industry. In recent years, in conjunction with strong support from the government's technological development programs, local companies and R&D institutes have been working out advanced active safety systems for automotive applications. These new systems have been installed in some locally-assembled cars and may, in the future, target the China market.

The OE Business

The worldwide increase in new-car sales is also boosting business for a growing group of original equipment (OE) parts suppliers in Taiwan. For the island's auto-parts makers, the silver lining in the global economic meltdown was redoubled efforts by automakers to cut costs, a trend on which Taiwan's competitively priced, high-quality suppliers are well poised to capitalize.

Only about 20% of the auto parts made in Taiwan are destined for the OE market, but that ratio has been growing in recent years along with the efforts of suppliers to improve quality while keeping prices competitive. This has endeared Taiwan-made parts to cost-cutting automakers and tier-one parts suppliers in Europe and the U.S.

And it seems that even in the most difficult of economic conditions, local OE parts makers can profit from their vaunted small-batch, large-variety production mode, winning orders from foreign automakers for relatively small-volume car models that lack the economic scale of big-volume production.

Tapping into the supply chains of automakers and tier-one parts suppliers is not an easy task, since the two are often joined at the hip. But automakers' supply chains sometimes break down; this is expected to help Taiwanese producers win a growing share of OE orders, opening a new door for local suppliers who want to expand beyond the saturated domestic market. Increasing numbers of prominent first-tier parts suppliers have filed for bankruptcy in the past few years, offering more business opportunities to local companies that can compete in both quality and price.

Parts suppliers in Taiwan are boosting their exports of OE parts, especially to the overseas plants of Japanese automakers in the Association of Southeast Asian Nations (ASEAN) area and mainland China.

Among the tier-ones that now outsource production to Taiwan or cooperate with local partners to cut costs are many of the biggest names in the industry, including Visteon, Dana, Delphi, and Magna.

EV Fever

Another positive force for Taiwan's auto-parts industry is the global electric vehicle (EV) fever. Many local companies have been able to secure a leading position among parts manufacturers by supplying lithium-ion battery packs, electric motors, and key parts of power control units to international EV makers.

Taiwan-made parts now are seen in many prominent battery electric vehicle (BEV) and hybrid EV (HEV) models, including the BMW Mini-E, Tesla Roadster, Fisker sports car, Ford Escape Hybrid, and Chevrolet Volt, and will be adopted for an increasing number of models offered by other automakers that want to cash in on the inevitable trend toward EVs and HEVs.

In addition to the vigorous efforts exerted by private companies over the past few years, Taiwan's government has also been promoting the rapid development of EV-related industries through a variety of R&D-subsidy programs. In addition, the government has been commissioning domestic research institutions to help develop newer and better technologies for transfer to the private sector, aiming to make Taiwan into not only a good market for EVs, with a well-established recharging infrastructure, but also an important supply base for EV-related key systems and parts.

Some of Taiwan's assembled-vehicle makers have introduced their own BEVs, and some are planning to promote other types of EVs such as plug-in hybrid electric vehicles (PHEVs) and HEVs. The domestic EV-related parts sector is also expected to grow rapidly over next few years, adding a new dimension to the development of the island's auto-parts business.

Automotive Electronics

With the strong support of Taiwan's world-class electronics and ICT industries, auto-parts producers are also pulling ahead on the innovation front, supplying advanced automotive-electronic systems and components to global customers at reasonable prices.

An increasing number of advanced automotive-electronics systems have been developed by local auto-electronics companies, who are eyeing not only domestic carmakers but also the huge market in China.

Local companies have made significant headway in both the OE and AM segments of the auto-electronics market over the past year. Among the world-class products they now supply are tire-pressure monitoring systems (TPMS), telematics on-board units (OBUs), charge-coupled device/complementary metal-oxide semiconductor (CCD/CMOS) cameras, thin film transistor-liquid crystal displays (TFT-LCDs), engine control units (ECUs), AC/DC converters, light-emitting diode (LED) lamps, portable navigation devices (PNDs), and night-vision systems.

Competitive Advantages
Supported by a comprehensive and highly efficient central-satellite plant system which enables individual suppliers to specialize in specific fields, Taiwan's auto parts suppliers enjoy a high level of production flexibility, broad product range, low production costs, and fast development time.

Another advantage enjoyed by local auto-parts makers is their division-of-labor manufacturing networks in Taiwan, mainland China, and other countries. With plants on both sides of the Taiwan Strait, producers can meet a wide range of customer needs in terms of pricing, quality, quantity, and lead times.

In this new year of 2012, Taiwan's auto-parts makers are well prepared for further business advancement. The advantages mentioned above, plus the core competitiveness of its auto-parts industry, without doubt make the island the best choice for global buyers at a time when cost/performance (C/P) value is the key to success.