Certification is a key to the world's largest market

If you are in the parts business, then I don’t need to tell you that last year was a challenge. Especially as OEM sales to the United States went. A lot of them kind of – went away.  On Monday, America’s 2008 new car auto sales have been announced. They were ugly. According to Reuters, “the battered industry closed out its weakest year since 1992 in its largest single market.” 13.2 million of what the U.S.A. calls “light vehicles” (passenger cars, SUVs, and pickup trucks) were bought new in 2008, down 18.5 percent from 16.2 million in 2007. U.S. sales had peaked at 17.4 million in 2000, and as they say in America, it had been downhill from there.

We all of course hope that things will turn for the better this year. In China? Probably. In the U.S.A.? We don’t think so. Actually, all three big American automakers think that the new year will be even worse than 2008. December sales had been especially bad with GM down 31 percent, Ford down 32.4 percent, and Chrysler down a record 53 percent from a year earlier. U.S. carmakers don’t expect this to change soon. "The first several months of 2009 are going to feel very much like the last few months of 2008," said Ford economist Emily Kolinski Morris. "We see little to indicate a near-term improvement in either financial market conditions or economic activity."

Chrysler thinks that 11.1 million new light vehicles will change hands in the U.S.A this year. Ford estimates it will be 12.2 million. GM figures, it will be anywhere between 10 and 12 million. J.D. Power & Associates is forecasting U.S. sales this year of 11.4 million units.

GM said it will become profitable again once annual U.S. sales return to between 12.5 million and 13 million. Apparently, GM doesn’t expect any profits for this year.  Stephen Spivey, senior automotive industry analyst at San Antonio, Texas-based consultants Frost & Sullivan, said he expects the industry to hit bottom in the next six months. 

Last week I already gave an opinion where I would turn if I were a parts maker. I would turn to the after sales market. I would turn to Europe.

To after sales I would turn because the after sales market is always up when new car sales are down. As a press report from the U.S.A. says, “repair shops and parts dealers say they are reaping a windfall from the downturn in automobile sales because drivers are keeping their vehicles longer.” 

To Europe I would turn, because it is by far the largest economy of the world, because Europe buys more than twice the number of new cars than the U.S.A., and because the European new car market is going down, but it is not going down as hard as in the U.S.A. The European after sales market also holds higher potential and profits than the U.S.

Many Chinese parts makers have avoided Europe because they thought, Europe is too difficult to enter. It is difficult. Europe has a tight and often complicated system of rules and regulations which have to be mastered. But it is like a university exam. Once you have mastered it, a better paid and more secure career awaits you. The exam also has drastically minimized your competition. 

Europe goes by the rules devised by the World Forum for Harmonization of Vehicle Regulations. This is a working party of the United Nations Economic Commission for Europe (UNECE). It is tasked with creating a uniform set of regulations for vehicle design to facilitate international trade. Despite its European name, UNECE has worldwide impact. Its rules are valid in more than 50 nations of the world. Once you have mastered UNECE approval in one of the countries, your product is legal and can be sold in all of the other countries that accept the ECE rule.

The system operates on the principles of type approval and reciprocal recognition. Type approval means that your part needs to be tested and approved first before it can be used in the car. Reciprocal recognition means that any country that is a signatory to the United Nations agreement has authority to test and approve a part. Once approved, every other country that is a signatory must honor that type approval and must allow the vehicle or part as legal for import, sale and use. The type approval is usually held by the manufacturer, and the manufacturer is responsible for compliance. 

Items approved as meeting an ECE Regulation are marked with an E and a number, within in a circle. This is commonly referred to as an “E-mark.” The number indicates which country approved the item. “E1” for instance stands for Germany, “E4” stands for the Netherlands, “E52” stands for Malaysia, “E43” stands for Japan.

If you want to export parts to Europe or to any of the more than 50 nations that accept ECE rules, then you should bookmark this webpage forever. It tells you in English. French, and Russian anything you ever wanted to know about the E-mark. However, be warned: It reads as excitingly as a law book. Like with the law, you may need the help of a professional to understand every detail. 

The first thing you need to know is whether your product needs an E-Mark at all. That alone is a challenge to find out. Not every product is covered by ECE rules, and not all signatory states adopt all ECE rules. Europe usually adopts all ECE rules for all EU member states. Some countries, for instance Japan, just adopted a few. There are currently 126 regulations, from Regulation 1 (“Uniform provisions concerning the approval of motor vehicle headlamps emitting an asymmetrical passing beam and/or a driving beam and equipped with filament lamps of category R2”) to Regulation 126 (“Concerning the adoption of uniform technical prescriptions for wheeled vehicles, equipment and parts which can be fitted and/or be used on wheeled vehicles and the conditions for reciprocal recognition of approvals granted on the basis of these prescriptions.”) New regulations are being added, and regulations are being changed. What was legal last year doesn’t have to be legal next year. One needs to keep up with the amendments, which are issued on a regular basis. The rules and the amendments are listed on this webpage.

The actual E-marks or type approvals are usually issued by a governmental agency of the respective country. Usually, this governmental agency does not perform the tests necessary to receive the type approval. The tests usually are performed by a technical service accredited by the country. Not all technical services are accredited for all regulations. Once the technical service has positively tested your part, it will document this in a technical report which becomes the basis for the official type approval. A positive test by the technical service usually means that the type approval will be granted.

As you have realized by now, the help of a good advisor is absolutely necessary to successfully navigate the thicket of ECE rules. The technical service should be a good advisor for the details of the type approval. Some are, some are not. Some simply give you a pass/fail result and nothing else. Some will work like tutors or coaches and assist you in making the engineering changes to achieve and maintain the required results. It’s a bit like playing golf. You can hire a caddy, or a golf pro. A caddy will carry your clubs. A golf pro will help you win the game.

Pick your ECE technical service wisely. Our company has worked with many. Our company also has seen several of our Chinese suppliers receiving the wrong advice and being overcharged. If you want my personal opinion – which I don’t want to voice in a public forum like this – please feel free to ask me.

Where should you get your type approval? Theoretically, and under the rules of reciprocal recognition, it does not matter. Just like theoretically, an MBA from an unknown university is just as good as an MBA from Harvard. You know that in real life, this is not true. As some students think an MBA from an unknown school is good enough, others think the expense and amount of work an MBA of a highly reputable university are well worth the investment. Same goes for the E-Mark. 

Wikipedia says: “Although all countries' type approvals are legally equivalent, there are real and perceived differences in the rigor with which the regulations and protocols are applied by different national type approval authorities. Some countries have their own national standards for granting type approvals, which may be more stringent than called for by the ECE regulations themselves. Within the auto parts industry, a German (E1) type approval, for example, is regarded as a measure of insurance against suspicion of poor quality or an undeserved type approval.”

A German E1 type approval so to speak is the E-Mark equivalent of a Harvard MBA. An E52 from Malaysia makes the part legal in all countries that adopted the ECE rule. With an E1 from Germany, the product will be much easier and usually more profitable to sell, anywhere in the world. A Malaysian manufacturer we work with gets all his products E1 certified in Germany. 

There is another positive effect. Usually, a product imported to Europe does not have to be marked with the country of origin. When you export for instance a brake pad to the U.S.A., you must mark it “Made in China.” When you export it to Europe, you don’t have to. However, your brake pad is only legal in Europe if it is marked with the proper E-Mark and the type approval number. If your brake pad carries an E1 E-Mark, it is undistinguishable from a brake pad made in Germany.

There is yet another reason for not taking the easiest and cheapest route: You may get in trouble if the part is later checked in a more rigorous country, and if it fails.  

If a non-compliant part is found in one of the signatory states, the matter will be referred to the government agency in the country that issued the E-Mark. That agency then will take further action.

“However, if the part is so out of spec that it endangers safety, any signatory state can block the part for up to six months,” says Xaver Fackler, owner of  Germany-based testing lab  FAKT. A brake pad for instance that doesn’t have the braking efficiency as mandated by ECE R-90 would endanger safety and could be blocked by any country immediately. The part would be illegal for use and a recall may be ordered. If your parts business to Europe is to be successful, you definitely don’t want to get in trouble in Germany, the world’s second largest economy.  

For all these reasons, our company usually insists on an E1 E-Mark for all products we have manufactured in China for export to Europe and elsewhere. Even if a manufacturer’s product already has an E-Mark from another country, we usually insist, and assist them to get an E1.

Next Monday, we will dive a little deeper into the details of how to get, and most importantly, how to keep your E-Mark.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.