What to sell and what not to sell to Europe

Chinese parts makers who want to escape the American carmageddon have set their sights on other markets. Next to China itself, the most promising market is the aftersales market of Europe. Which parts should you sell to Europe? Here is the easy answer: The parts that allow you to be most competitive in the European market. To be competitive, your products must not just be competitive when they leave your factory, they must be competitive when landed in Europe. Several factors play a role:

1.) Raw material to labor cost:  Raw materials cost pretty much the same all over the world. If your product has a high ratio of raw materials to labor, it probably will not make much sense to export: The part will most likely cost the same to make in Europe, especially when automation comes in.

2.) Value of product to shipping cost: Whether you fill a container with a few bulky cheap items or with a lot of compact higher value items, to ship the container from Shanghai to Hamburg costs the same.  The recent drastic decline in container freight rates has made shipping less of an issue. These days, it often costs more to truck the container from Hamburg to Frankfurt than what it costs to ship it from Shanghai. Taking a longer term view, this situation likely will not last. By the same token, it will be many, many years until we see a return of the excessive shipping costs from the first half of 2008.

3.) Customs duty.  Usually, the import duty on automotive parts to Europe is low. 3.5 percent are common. But there can be nasty surprises: A warning vest for instance, which we see as an automotive accessory, is often viewed as a garment by customs officials in Europe. Garments carry high custom rates and can be affected by quotas. Also, the European Union has decided to slap anti-dumping duties of 26.5% to 85% on China-made fasteners over the next five years.

4.) Need for type approval. If your product needs an E-Mark, there will be a cost for certification. If type approval is needed, this can mean a huge up-front investment. In the brake pad business for instance, you need a portfolio of at least 200 to 300 pads to be taken into consideration. At a cost of maybe 20,000 RMB per certification (excluding your engineering and development cost,) the certification program alone will cost you several million yuan.

5.) Demand. Is there enough for your product? If the product needs certification, will you sell enough product to recoup the certification cost?

All of these factors have to be carefully balanced against each other.

As for demand. the European aftersales market is huge. It is so huge that proper numbers are hard to come by – partly due to the rapid expansion of Europe eastwards. There are approximately 250 million cars on the road in Europe, representing annual aftersales expenditures of approximately $290 billion.

According to our data, the European parts market breaks down as follows:

Mechanical Parts 31.1%
Crash Repair 21.1%
Wear & Tear Parts 16.3%
Service Parts 10.6%
Consumables & Accessories 10.4%
Tires 10.4

If you look at the data, you will see that Mechanical Parts and Crash Repair make more than half of the market.  Should you focus on those? Mechanical parts are a very complex business. A large European auto manufacturer has to maintain an inventory of hundreds of thousands stock keeping units (SKUs) to properly satisfy this market. Crash repair mostly deals in bulky body panels, which are expensive to ship and to store. Also, according to European law, most of these parts, visible from the outside, are under design protection of the automakers. All visible parts of the vehicle, even bumpers, headlights and mudguards are affected. This matter has been under discussion for years. The design protection may fall, or it may not. Currently, it is still on the books.

The other half of the market, Wear & Tear Parts, Service Parts, Consumables & Accessories, and Tires are clearly of higher interest to the Chinese manufacturer.

Wear & Tear parts, such as brake pads, brake disks, shock absorbers and exhaust parts are the traditional bread and butter segments of the industry. A good deal of brake pads, brake disks and shock absorbers sold in Europe are made in China.  OEM shock absorbers now have a service life of up to eight years. However, for instance in Germany, more than half of the cars on the road are eight years and older, providing a healthy market for shock absorbers.  Shock absorbers do not need an E-Mark. But surprise: If the shock absorber is combined with a coil spring, als known as a suspension kit, the suspension kit needs to be type approved.

For a long time, exhaust parts did not make much sense to export to Europe. They are bulky. There are many types. They need to be certified. For a long time, the value of product to shipping cost alone made the exportation of exhaust parts prohibitive. Shipping costs have come down. Certain exhaust parts may be worth a careful look.  Long term outlook for exhaust parts is not so good, as more and more exhaust systems for new cars are made from stainless steel.

Working further down the list, service parts can be a mixed bag. Air filters make little sense, they are cheap, bulky, require little manual labor. Oil and fuel filters may be more interesting. Belts can be profitable. Timing belts on the other hand can bear a huge product reliability risk: A broken timing belt can break the whole engine. Anything that gets routinely exchanged during maintenance, such as spark plugs, EGR valves etc. is good business.

The accessories segment needs little comment. Most accessories are already manufactured in China. Keep in mind that many accessories sold to Europe need certification, often even type approval. Consumables such as oil or liquids are better left to the large European companies.

Lastly, tires: A set of tires can be very expensive. As the economy goes down, customers look for value. Mid-priced, good quality tires can be a good business. They can be a more interesting business if sold on rims, balanced, ready for installation. The recent drop in shipping costs has made this business even more interesting. Both rims and tires must be type approved according to ECE norms when sold in Europe. Also keep in mind that tires are regularly tested by large car magazines and auto clubs. If your tires have an attractive price and land in the mid range of the test results, you are fine. If you land at the bottom of the list, this usually means the end of your business,.

That’s it in broad strokes. A business as huge as the aftersales parts business can’t be painted in broad strokes however. There are many niches, nooks and crannies. I know of a company that makes a nice and profitable business selling lamps and lights for antique cars. I know someone who imports millions worth of fuel pumps, and fuel pumps alone. I know someone who does an interesting amount of business in installation kits for exhaust systems. I know of companies eager to buy engine parts for diesel engines of trucks which are long out of production. Sometimes, a small niche which is overlooked by the competition can be a much healthier and safer place than a high volume area crowded by fierce competition.

Next time: Managing quality, a shared responsibility

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.