The Chinese Automotive Supply Boom

I had the chance to look through a presentation that Lisa Reisman of Aptium Global recently gave to a group of automotive suppliers. It had a number of facts and trends worth sharing here at Spend Matters, some of which are rather enlightening, especially if you think China is an ideal source of supply for all things automotive. Hint: it’s not.

What follows are many of the highlights of her presentation (in many cases quoted verbatim). First, for those who think China is just getting into the global automotive supply market, you'll be surprised. Here’s a few basic fact about the market:

- 4833 China auto component suppliers by end of 2004

- 800 foreign auto component suppliers currently operating in China

- China's component market grew from $5.7 billion in 2003 to $8 billion in 2004

- By 2008, US auto suppliers will purchase 35% of their components from low cost countries including China

The sources for this information come from: McKinsey, The Economist, Booz Allen Hamilton, and Chinese Business Review. Despite this growth, however, it’s not as perfect a picture as the number portray. Consider that China has:

- Low capacity utilization resulting in inefficient economies of scale

- Weak product development capabilities

- Significant challenges with counterfeiting and intellectual property infringement

- Component manufacturers already feeling a margin squeeze from other low cost regions

- Over investment (e.g., 25 engine and transmission manufacturing plants currently under construction)

- Not yet seen consolidation in its automotive supply market

In addition, volume constraints challenge Chinese suppliers to meet the flexible demands of many procurement organizations. This is because that many new Chinese manufacturing facilities are built around high volume expectations that favor large export orders. This allows suppliers to amortise freight and logistics costs over the greatest number of units

The level of technology sophistication among the majority of Chinese automotive suppliers is low to moderate. In fact, most of the technologically sophisticated operations are joint ventures with Western or SE Asian Tigers. Because of this, low to moderate technology products ramp faster to acceptable levels of quality then a technologically sophisticated product where the Chinese partner has a steep learning curve. Castings, stampings, and PCBs are ideal, for example, while components requiring electronic management technology are less so.

Chinese manufacturing favours regular, repetitive processes in part because newly industrialized countries rarely adopt lessons from leading industrial producers in the early stages of rapid industrialisation. Low labor costs do not compel Chinese firms to adopt the rigors of lean manufacturing in the same way as high wage markets like Japan and the US. Consequently Chinese manufacturing operations tend to have a degree of inflexibility in their culture that, in a booming market, favors regular repetitive production runs over high mix low volume lots.

And what about JIT programs? Keep dreaming. China traditionally has low levels of on time delivery performance. China’s poorly developed internal logistics infrastructure is to blame as is long voyage times to US and then the potential for customs clearance and delivery delays.

For many companies considering the Chinese market, security of IP remains a major concern in dealing with Chinese firms. This is in contrast with India where laws are more reliably enforced and property rights generally respected.

Given these and other issues, it turns out the list of automotive components which make sense to look to China for is relatively short. This includes: aftermarket parts, brakes and brake parts, internal body parts (e.g. roof supports, tail gate brackets and hinges), compression molded rubber parts, electronics and meters, fasteners, injected molded plastic parts, passive electrical components, mold tooling, motors, shock absorbers, stamping dies, tires, wheels and wheel parts, and wire harnesses and cable.

When sourcing these components from China, supplier identification is often the easy part. Supplier qualification turns out to be far more difficult -- don't short cut due diligence! It is a good idea to partner, at least initially, with good on-the-ground resources that can work with your suppliers and be there to check quality. Last, don’t forget to develop contingency plans and buffer stock.

And don’t think that China will always be a low cost source of supply. Eventually, the "China price" will edge closer to western prices. Given this, proceed with caution when it comes to JV’s. In the end, JV’s that focus on sales operations into China may have longer legs than sourcing-only JV’s.

- Source of material for this blog entry: Lisa Reisman
Jason Busch

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