Industry overview: Automotive components in China

IN the course of china’s Automotive boom, the components industry is growing at double-digit speed. We take a closer look at the market and its latest trends.

 

Fragmented growth and a shift to higher value goods

China’s auto component industry has grown impressively in the past few years. The size of the industry nearly tripled from 2003 to 2006, achieving RMB 544 billion in revenues in 2006 (National Bureau of Statistics). The growth is driven by the strong domestic increase of car sales - China now is the third largest automotive manufacturing country in the world, producing 8.9 million units in 2007. Since the auto component industry is largely influenced by the global sourcing demand, it has developed even faster than the local vehicle manufacturing sector. Since 2000, the car components’ share of the overall automotive industry has increased steadily, currently accounting for 40% of its size. There is even further room for growth as this figure is far lower than the 70% average of developed auto manufacturing countries. Overall, the auto component industry is expected to continue its strong increase of more than 20% over the next few years.

In addition to its significant growth rates, China’s auto component market is highly fragmented. There are about 6,500 manufacturers with a high degree of fragmentation – according to the China Automotive Industry Yearbook, only 38 companies achieved annual revenues of more than RMB 1 billion. By contrast, the 1,500 foreign component players account for 49% of the revenues of the entire industry.

 

 

The rise of China’s auto component industry is part of a much broader shift. In the context of global supply chain management, China is decidedly moving up from basic consumer products towards higher value industrial goods that pay better margins. The average net profit margin of the component industry in 2007 (5%) was higher than for the automotive industry as a whole. Interestingly, the majority of China’s exports from local firms cover tyres, wheel hubs and auto glass, products that involve a high level of manual labour during the manufacturing process and are often damaging to the environment.

 

International dominance

On the other hand, international competitors continue their dominance in the core functional components that require sophisticated technology and independent R&D, such as engines, alternators and fuel injection systems. One reason for this supremacy are the controversial Measures for the Administration of Import of Automobile Components and Parts Featuring Complete Vehicles of 2005 which have prompted many international auto component manufacturers to increase investment in their China operations to avoid hefty import taxes. Another factor contributing to the foreign companies’ large market share lies in their wide global supply relationships. In order to cut costs and localise their production, foreign vehicle manufacturers typically attract the first tier suppliers they work with in their home markets to invest in China so that their long term supply relationships can continue. Moreover, unlike the 50% cap for foreign shares in vehicle companies, no such limit exists in the auto component industry. This means that foreign manufacturers may set up a majority share-holding company or even WFOEs to optimise their profitability. In the case of a joint venture with a foreign majority share, this also implies that the foreign party does not have to transfer the core technology. Therefore, it comes as no surprise that foreign companies account for 90% of the key functional components, while their Chinese competitors have largely been confined to low value components, usually without an electronic control system. This obvious imbalance can be explained by the technological competence of foreign vehicle manufacturers. International auto manufacturers on average invest around 3-5% of their revenues in R&D, while Chinese companies barely manage 1%. International auto component manufacturers also participate in the design and testing of vehicles they intend to supply to at an early stage. Therefore, Chinese manufacturers of key functional components have not been able to enter the global supply chains. It is safe to say that foreign competitors will continue to benefit from their control over key component technologies and efficient management.

 

Challenges & trends ahead

As international automotive value chains have gradually transferred to China in recent years, the positive economic outlook of the country has promised strong demand for auto components. Yet despite healthy growth figures, the industry is also facing mounting pressures and new challenges that will further undercut profitability and possibly even get the long awaited consolidation under way. As of July 1st, 2006, China’s auto components industry entered a transitional period effected by China’s WTO membership. The average tariff level for automobiles dropped to 25% and that of auto components to 10% which of course increased competition in the local market. On the other hand, export-oriented businesses will face the problems wrought by a strong RMB against USD and the ongoing reduction of China’s VAT rebate for auto component exports. These could squeeze out the tightening profit margins already kept low by increasingly fierce competition and soaring raw material prices. Large foreign competitors have already seized this opportunity and increased their investment in China in an attempt to consolidate their various operations in China according to their strategic locations and product offerings.

One emerging trend is that international competitors have shifted their focus onto becoming OEMs of Chinese automotive companies. Johnson Controls and ArvinMeritor have forged ties with Chery Auto. SAIC and Dongfeng have already signed a deal with Visteon. In order to further bring down costs and optimise profitability, many multinationals are setting up R&D centres within China. Delphi Packard established a local R&D facility and an electric testing machine in Anting and Shanghai in 2005 and 2007 respectively. By doing so it was able to move into the value chains of China’s domestic auto brands, as well as continuing to supply to the Chinese joint ventures of their existing global accounts. International competitors are also looking at opportunities to collaborate with domestic companies on the R&D of key components. Since 2002, AVL List, an Austrian powertrain design consultancy, has worked with Chery, an indigenous car maker, on the design and production of engines, including the more environment-friendly diesel engine systems. With current record fuel prices and the drive of China’s government to cut pollution caused by car emissions, there is ample room for international leaders to grow their businesses in this market.

» Latest News Index
» Subscribe Fiducia Newsletter