China carmakers need strong supply chain management

-----Dr. Thomas Callarman is professor of operations management at China Europe International Business School (CEIBS) , and director of the Centre for Global Operations Management and Value Chain Integration. Before joining into CEIBS, Dr. Callarman was associate professor of Supply Chain Management in Arizona State University. He was Director of Institute for Manufacturing Enterprise Systems, President (deleted elect) of the Decision Sciences Institute, Past-President of the Western Decision Sciences Institute and is Past-Chair of the Board of Directors of the Materials Management Group of the National Association of Purchasing Management . Dr. Callarman has over 25 years experience in research associated with operations management. He has consulted with several Fortune 500 companies, including Motorola, Intel, IBM, Boeing and others in the various areas of operations management. 

Gasgoo.com: We learnt that you've been experienced in Supply Chain Management and Operations and Logistics Management. So in your opinion, what are the fundamental, underlying business process differences in the supply chain for those global and local Chinese companies?

Dr. Callarman：China's automotive companies are doing more similarly to the counterparts in Europe and America. But in terms of developing suppliers, particularly tier2 and tier3 suppliers, it's quite different. At the raw material supplier level and the tier1 supplier level, it's very similar to other automakers in the world. But in between, it's quite different. They should develop more local suppliers of their own; of course some of the Chinese automakers are doing better in terms of developing its supply chain. For example, Shanghai GM is a leader in supply chain development, which has a relatively high local content-they use a higher percentage of parts and components in their cars from local supplier than the average level. General Motors has been developing domestic suppliers to replace many international suppliers.

Another thing that is very different in China is the physical infrastructure-moving the materials around the country. And it will be significantly developed by the year 2010. All the means to move the products and materials around--the railway, highway system or others--are still improving, while all these are already well-developed in the American and European markets.

Gasgoo.com: How about the supplier relationship?

Dr. Callarman：There's a number of good, qualified suppliers in China, but the number is small. So there's lots of competition among the buyers for the capacity of good qualified suppliers. Only very a few of these local suppliers are in a good position-they can pick and choose whom they're to sell-their bargaining power is strong.

The supplier relationship here is also different. The attitude is similar to (Japanese automakers)-to try to build long-term relationship with key suppliers. But again, as I said, the domestic suppliers are in a strong position relative to the customers, because they may have multiple manufacuteres trying to buy from a limited number of suppliers. So the bargaining power for the suppliers is relatively stronger than for the automakers.

Gasgoo.com: How could the automakers and their suppliers strengthen their ability to react to reduced order cycles and uncertainties in forecasted car sales fluctuations?

Dr. Callarman：It's very difficult for the automakers to adjust because they build their capacity based on the expected sales. But it's more difficult for them to adjust upward than adjust downward (to adjust downward, you just cut the production)

Of course, there's impact on the suppliers, as the automakers and the suppliers all expected to meet a 10-milion-unit sales target this year, and they're all geared to set up the capacity based on that. So obviously there's overcapacity. But I think it's easier for the manufacturers to decrease the output than to increase it. Any way, the extra capacity is extra cost, which will actually impact the industry. The suppliers should slow down the delivery of materials and parts, but they still should be able to meet the overall demand. To me, it's much easier for the tire1 suppliers to bring parts than the automakers to bring the finished products.

Gasgoo.com: Should the suppliers build their capacity based on the demand for parts（like Denso does） or for the finished product (the built-up vehicles)?
Dr. Callarman：The suppliers, take a tier1 supplier as an example, should set up their capacity based on the forecast on the total demand for final automobiles and the forecast on their market share.

Gasgoo.com: There're many interfaces and participants during the whole supply chain, where did the most transaction costs arise?

Dr. Callarman：The manufacturing cost of many Chinese automakers is relatively low. They are very efficient manufacturers; probably they're more efficient that the counterparts in America or Europe, because of the very recent investment in their plant, they have the state-of-the-art facilities in the world-as long as the capacity and demand match. The material cost has been relatively high, but it's global price. The price of raw material and energy impacts all players in the world.

But China has high logistics cost. The transportation cost within China is among the highest of the world as the percentage of the final cost-the infrastructure to move the products around the country is not as efficient as it will be in the near future, because it's not fully developed. Estimates show that the logistics cost in some industries inside China is roughly 40 to 50 percent higher than in the developed countries.

Another thing related with cost in China is some key components in the car. Lots of key components of which the intellectual property is controlled by the global supplier are still not being manufactured in China. So the local automakers have a high cost structure on the patent and the transportation. Last time I heard a key component in the cars is 100 percent higher than in the European market. Although it's a small part, it contributes to the whole profitability.  And this may not be all the small parts, it might be the transmission part; these parts are well protected because they're highly value-added.

As for the distribution process, actually I'm looking into the dealerships in China. Dealers, in the world are always not profitable. You can see that dealers in China, as well in other markets are closing as they can't make enough profit. Apart from that, the distribution from the automaker to the dealers is more-expensive and less efficient than that somewhere else. Also there're lots of low-volume dealerships, but when you have low margins, you should have high volume-so it's possible that some options like consolidation or large dealership groups to increase the sales volume, thus offset the low-margin.

The aftersales market itself is not mature, because there're so many first-time car buyers in the last five year, the aftersales has not yet formed into a culture. But this is an area where dealers make most of their profit, and the dealership should pay much more attention to.

One thing I would like to suggest is that the Chinese auto industry should not make the same mistakes made in the American or European market, where the dealerships are relatively unprofitable. It's the same (dealership) model that was used for 50 years in America; they are not running as efficient as they could be. As the retail aspect of the auto industry continues to grow in China, I hope the players here would look closely at the mistakes made in the overseas market and not copy those mistakes.

Gasgoo.com: But the Chinese dealership structure is more like the Japanese type, as the 4S shop was initiated by Guangzhou Honda, and now every one is taking that form, right?

Dr. Callarman：It varies. If you look at the Japanese manufacturers, they use the Japanese type of dealership, but if you look at the American manufacturers, they use the American type. If it's a foreign manufacturer, and they will control the distribution chain, and use what they're familiar with. So I'd like to caution that the Chinese automakers should be careful and understand the good points and bad points of the dealership operation overseas.

Gasgoo.com: Can you give us a specific explanation on the bad points of the American dealership structure?

Dr. Callarman：The dealerships in the US focus on the sales and marketing. And there's nothing wrong with it, but they also should look at the efficiency within the process to meet the market goals. When you go to an American auto dealership for repairs, you probably have to leave your car there for a day, and that's very inconvenient. I would suggest the American dealerships look at different ways to manage their process of services, selling the cars and so on. Clearly they have to do differently here (in China) since the buyers opt to pay in cash, while the American buyers prefer a car loan. This is one of many differences. If you look at the General Motors's advertising today, they would tell you the big benefit is that you could have 50 banks to choose for financing the car. Auto financing in China is just at the starting line, and they should be careful that the business goes appropriately with the market, and it's much easier to develop an efficient process at the beginning than when they have already to fix the problems.