My biggest grief with the Chinese parts industry

My biggest grief with the Chinese parts industry is that buying parts in China is very hard. The Chinese parts industry is losing huge amounts of business because the Chinese parts industry remains very inaccessible to many foreign buyers. I know, I shouldn’t say that, because my company is in the business of bridging the demands of foreign buyers and Chinese manufacturers.  If everything I am going to write would change, I would be out of business. I’ll write it anyway.

A recent article in Gasgoo, said that “China auto parts manufacturers face a cold snap.”  All who are in the parts industry know that it is much more than a cold snap. It is an ice age. Sales had begun deteriorating in the first half of 2008 due to high raw material prices, paired with high transport costs, and paired with a low dollar. In September 2008, the U.S. new car market crashed. It still hasn’t stopped crashing. Other markets, such as Europe and Japan followed.

The article in Gasgoo says: “Amid the depressing international environment, analysts commonly advise Chinese auto parts companies to turn to the domestic market. But some think differently, like Kevin Chen, president and CEO of Gasgoo.com, B2B marketplace for export and import of auto parts, who believes they should enhance exports and globalization. Chen points out that globalization will become the consensus of Chinese complete car and parts manufacturers in the future, and they need to enhance their management, by making full use of the opportunities coexisting with the financial crisis.”

Both views are right. The domestic car industry still shows some growth. It will also consolidate to fewer makers and brands. Consolidation is always dangerous for suppliers.

Kevin Chen is right. Especially during times of crisis there are big opportunities for low costs producers. The biggest opportunities are in the after sales market. The after sales markets in the U.S. and Europe are huge and are very stable. A car purchase can be delayed. A defective brake must be repaired.

The Chinese parts industry is mostly focused on OEM sales. In that, it doesn’t need any help. But worldwide new car sales are way down, and by all projections, it will take many years for them to recover. It’s the focus on OEM sales, along with a cratering new car market that is hurting the Chinese parts industry.

The after sales market is there for the taking. But as Kevin said, parts manufacturer must adapt to make full use of the opportunities.

Here are the biggest problems facing a European or U.S. wholesaler who wants to source parts in China:

1.)    A lack of systems. In Europe and in the US, there are computer systems which give you all the manufacturers of any given part by any given cross reference number. Gasgoo is doing a heroic effort with their OEM number search. But even Gasgoo has to resort to manual labor and contact manufacturers one by one. Your higher priced competitor in Europe or the U.S. is accessible on-line.

2.)    A lack of transparency. How does a foreign buyer know that a Chinese manufacturer is good or bad? How does he now whether it is a manufacturer or a trader? Your higher priced competitor in Europe or the U.S. is a known entity.

3.)    A lack of knowledge of technical specifications. A buyer who works for a car manufacturer has his specifications down to a T. Most wholesalers have a parts number, and nothing more. They expect the manufacturer to know the specifications. Your higher priced competitor in Europe or the U.S. doesn’t ask the wholesaler for exact specifications or drawings. He simply sends the right product.

4.)    A lack of knowledge of certification requirements. In my previous columns, we talked extensively about E-Marks. Do you know whether your product needs an E-Mark? Do you know about the EMI/EMC requirements of your target markets?  Even something as common as an ignition lock must conform to various regulations in various countries. Do you know them all? Your higher priced competitor in Europe or the U.S. knows the regulations and guarantees compliance.

5.)    The long time between order and delivery. A common time for a first order is 40-60 days preparation and production, then 30 days transportation. That’s three months. Your higher priced competitor in Europe or the U.S. can deliver overnight.

And these are just a few of the problems. Our company often receives long shopping lists by European wholesalers with sizeable quantities. For each product category, we have to identify suppliers, solicit bids, select suppliers, manage production, and then organize the logistics. Without the proper systems, this can turn into a nightmare. We are used to the nightmare, and have people for it. A wholesaler who doesn’t have this professional help will give up. Another big sale lost for the Chinese parts industry.

A friend and colleague of mine, who shall remain unnamed, because he is the president of a large European parts manufacturer, and he is interested in keeping his job, recently said: “The Chinese parts industry could very easily turn the European market upside-down. A number of Chinese manufacturers could get together, produce the most important products in the most important product categories, and put them all in a central warehouse somewhere in Europe. Accessible on-line. Overnight delivery. Say, 50% over Chinese ex factory prices. This would be the end of my business, and the big European breakthrough for the Chinese parts industry.”

Next time: Let’s talk a little more about that central warehouse in Europe.

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.