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Overall Current Conditions and Trends of China’s Auto Parts Industry

From Gasgoo.com| December 03 , 2007

Auto & Motorbike Parts & Articles for Use Chamber of Commerce under All-China Federation of Industry & Commerce

Dignitary guests, ladies and gentlemen:

Good morning (afternoon, evening)! On behalf of China Federation of Industry and Commerce Auto & Motorbike Parts Chamber of Commerce, I’d like to extend my warm welcome and sincere thanks to all the dignitary guests as well as domestic and foreign friends! Here, allow me to give you a brief introduction on Overall Current Conditions and Trends of China’s Automobile Parts & Article for Use Industry.

In 2006, China’s automobile production and sales volumes both exceeded 7 million, and automobile volume has increased year by year. It is predicted that in 2007, China’s automobile production and sales volume will approach 9 million, and that China may become the second largest automobile manufacturing country in the world. Facing such huge completion and after-sales service market, how the automobile parts and accessory industry, as the auto industry foundation, will develop, becomes a subject attracting increasing attention.

Data shows that in 2006, there are 4712 enterprises with basic scale engaged in the auto parts and accessories industry, realizing the total industrial production value of RMB ¥550.6 billion, sales income of RMB ¥534.1 billion, the total profit of RMB ¥35.8 billion enhancement in product level, equipment level, manufacture technology and management level, formed comparatively complete auto parts industry foundation with large scale and certain level and provided basic guarantee for fast growth of the auto industry.

In recent years, China achieved fast growth in auto parts export, with export value eventually exceeding the import value. Last year, the total export value of auto parts reached 11.5 billion dollars, with a year-on-year increase of 35%, exceeding 11.1 billion dollars of import value.

I. Current Conditions of China’s Auto Parts Industry

1. Aggregate index rapidly increased. Auto parts have basically satisfied the needs of fast growing auto manufacture and social maintenance and repair service; the industry has got the basic ability to develop, produce and complete commercial vehicles and passenger vehicles; auto parts enterprises have been combined or restructured, and socialized and professional production developed rapidly. In 2007, the total production value of China’s auto parts industry is predicted to reach 670 billion yuan, with the sales value reaching 650 billion yuan.

2. Restructuring and merger took primary effects. Socialized and professional production developed rapidly, forming a competing and concertedly developing new industrial pattern under the diversified capital structure of orderly utilizing foreign capital, improving operational environment for the private capital and enhancing profitability of state-owned enterprises. The new pattern is mainly composed of three main parts: state capital, private capital and foreign capital. Currently, on supply chain completion mode, there coexist three typical completion modes, including “horizontal distribution and independent development” by Europe and America, “tower-like, vertical distribution” by Japan and Korea, and the completion system focused on independent domestic vehicle brands.

3. Investment by multinational auto parts companies increased year by year. As foreign multinational auto companies entered China, the overseas auto parts suppliers entered along in large batches and established joint venture or sole-venture enterprises in China. These enterprises cover different categories including auto electric parts, auto audio system, auto chassis and auto body parts.

4. The export volume grew rapidly. China’s auto parts export value grew very fast, by 6.6 times over the last five years. Products have entered OEM market from the after-sales parts market, and transformed from low value-added to high value-added and from disorderly export to orderly export. Particularly, some independent brand products began to enter the international procurement system, and the technical level of export products has been greatly elevated. In 2006, of the seven major categories of export products under statistics, four major categories of products including engines, auto parts, accessories & body, automobile and motorbike tire and other auto-related products have earned 21.554 billion dollars by export, representing 77% of the total foreign-currency export value of auto products.

5. Cluster effect primarily took on. Along with fast growth of auto groups, the cluster trend of auto parts industry focused on main vehicle factories also developed rapidly. Regionally divided, six auto parts industry concentrated areas have taken shape, including Northeast, Tianjin & Beijing, Central China, Southeast, Yangtze River Delta and Zhujiang River Delta. Clustering of auto parts industry can refine and specialize distribution, make it easier to realize large-scale, information –oriented, fast and convenient production and logistics management and dramatically increase economic benefit.

6. Private enterprises developed rapidly. Private enterprises represented obvious growing capability and competitiveness; they digested and absorbed the introduced technologies, which dramatically enhanced technical and quality levels of auto parts products; represented by enterprises of Zhejiang and Jiangsu Provinces, many auto parts enterprises have completed privatization, and private enterprises have become main bodies of China’s parts industry. The private economy demonstrated robust growing capability and competitiveness, not only becoming the main force for parts supply on after-sales market and for export, but also generating a batch of auto parts export enterprises with international competitiveness, represented by Wanxiang Group.

II. Problems faced by China’s Auto Parts Industry

For the recent years, propelled by fast growth of auto industry, auto parts industry has taken on a momentum of rapid development. However, we should also see that, China’s auto parts industry has a very weak position in the global supply chain, and facing many development opportunities, lagging problem of parts industry development became increasingly obvious.

1. The industrial structure is not rational. Currently, China’s auto parts enterprises, as a whole, are on a comparatively low level. Although there are tens of thousands of auto parts enterprises around the world, few have obtained required scale. As the strength is disperse, the integral advantage can hardly be demonstrated, which led to small investment in product development, backwards means, little data accumulation, inability to form strong development ability and satisfy the demands of foreign companies for large-quantity purchase.

2. The ability of independent product development is weak, and there are few famous brand products. Although China has basically formed complete system to match domestic automobiles, auto parts enterprises suffer from product similarity, small scales and weak ability to resist risks; their products have low technical content, lack of sustainable development ability, ad particularly lack of core technologies for main assembly and key parts of car. The enterprises generally lack of independent product developing ability, and most of them only invest about 1.4% of their sales income in product development, much lower than the average 15% of multinational companies.

3. Enterprises suffer from small scales and low professional levels. At present, there are tens of thousands of auto parts enterprises in China, but few have reached the required economic scale, and large enterprises represent less than 1% of the total number. Large-and-medium-size enterprises only occupy less than 15%, and the overall “weak, small and disperse” pattern of auto parts enterprises didn’t get fundamentally changed. Local governments, departments and enterprises are separately self-governed and seek quick benefit, so they cannot invest prudently from the strategic prospective, leading to serious similarity. Thus, they can hardly enter the high-end market with rich profit. Due to dispersed strength, their integral advantage can hardly be demonstrated. Most enterprises are only sole social maintenance and repair parts suppliers, not entering the completion market for entire automobile.

4. Products suffer from low standardization, serialization and generalization. Enterprises have weak awareness of brand operations, and standardization level of their products is low. Main types of China’s entire automobiles, especially passenger cars, come from different courtiers and companies, adopt different product standards and belong to various series, which greatly hinders standardization, serialization and generalization of auto parts products and seriously restricts the auto parts industry from further development.

5. The production cost control pressure is huge. The environment for development of China’s parts industry faces production pressures from both upstream and downstream positions; particularly, the cost control pressure of parts is still quite huge, increasingly compressing the profit margin.

6. The export structure is the type of “three low and one high”. Too dependent on export of material-intensive and labor-intensive products, the export structure of China’s auto parts is irrational, represented by the type of “three low and one high”, that is low value-added, low technical content, low price and high energy consumption, which led to poor export profit, weak competitiveness, disunited situation and increasingly serious vicious competition. The influence of Renminbi’s continuous appreciation on the export of auto parts is also increasing day by day.

III. The developing trend of China auto parts industry

In order to gain further development, the auto parts industry in China must get on the track of the global auto parts industry and follow its development trend. 
1.Gobalization

Economic globalization is a world-wide industry reconstruction which is motivated by the rapid development of science and technology. It takes the service of information network as the platform and advances with the performance of multinational corporations. Resources are allocated globally rather than just within one country. International trade of auto parts, which links purchase, production, R&D, sales, service, etc, involves global purchase, production outsourcing, international cooperation in R&D, and networking of after-sale service.

2. Specialization and large-scale development

Globalization has exerted a great influence on the development of spare parts industry. The changing relationship between auto and auto parts companies bring about two major changes in auto parts industry. Firstly, Auto parts industry has become more globalized; despite the considerable reduction of the total number of spare parts corporations the number of multinational specialized conglomerates has increased. Secondly, there are more labor-intensive industries in countries and regions with low production cost, forming a vertical demand and supply relationship with multinationals. This brings about the relocation of global resources in auto parts industry and a larger source of supply around the globe.

3. Development in science and technology

Many new technologies in astronautics, aviation, electrics and information have been applied in the production of auto parts by a number of companies in the world. By using these safe, energy-saving and environment-friendly technologies, autos have become safer, cheaper and more comfortable. Meanwhile, automobiles are also better automated and computerized. The high-techs, most notably in electronics and information, are not only widely used in production but also extended into the process of designing, experiment, testing, after-sale service, etc.

4. Professionalism 

The demand for high quality production, on-time supply, zero inventory and timely service requires suppliers to take the responsibility of being professional in R and D, manufacturing, testing, quality assurance, timely supply and market service. Therefore auto parts companies should find their right position in the market, design systematically, and supply in a modularized fashion. Besides, in order to improve competitiveness, they must pay attention to every detail.

5.Localization

As emerging markets enjoy great potential and have the advantage of low cost, while adopting globalized strategy multinationals should also push forward  localization, namely to utilize local resources and manufacture the products that can meet local people’s need so as to enhance local competitiveness and have access to the local market.

6. Tighter link with whole-auto industry.

Auto parts companies should view their development from strategic perspective, seize opportunities and take initiative in cooperating with the whole auto companies. The latter should change their philosophy in management and improve their relationship with auto parts companies, because only a combined effort of the two can lift their market competitiveness.
 
IV. The development goals of auto parts companies

Lastly, I will introduce to you the 11th five year (2006 - 2010) plan of the industry.

By 2010, we will establish a professional and large-scale auto parts system, which targets markets both home and abroad and enjoys the cutting edge management. By doing so, we may build a solid foundation to developing auto industry into the polar industry of domestic economy and make China the global factory of auto parts.

By 2010, the total sales volume of auto parts will reach RMB ¥ 1,300 billion, among which the parts for whole autos will be RMB ¥ 730 billion, the parts that can be maintained and repaired, RMB ¥170 billion, export value, RMB ¥400 billion (50 billion US dollars). The annual growth rate of export is 27.5%.  We will increase our share in the world market to 30%. Meanwhile the export of the technology and capital intensive products should be increased notably with the establishment of a set of export bases.
By the year 2010, many auto parts suppliers will be able to keep pace with the development of whole-auto industry, design systematically, supply in a modularized fashion and improve competitiveness in the international market. A system with the cutting-edge management based on specialized and large-scale production will be established to guarantee a sound economic return.

By the year 2010, many key parts R&D centers will be set up to keep up with the development of whole-auto industry. Leading companies in the industry should develop their own R&D ability so that 20% of new products will be independently developed by domestic companies and 30%-40% of the products will be developed by mainly relying on domestic resources.

Today, Chinese auto parts industry has entered another booming stage. The stable development of Chinese economy, the sustained prosperity of auto market, and the growing attention of foreign purchasers to Chinese manufacturers have brought about great opportunities to the industry. Chinese corporations should enhance communication and exchanges with their foreign counterparts to embrace a new phase of development.

In the end, I wish the seminar a great success and all our guests good health.

Thank you.

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