Moving up the value chain

Do you want to make a lot more money making and selling parts? Then you need to move up the value chain. Say you make a part for 100 Yuan. When times are good, you net maybe 10 Yuan on that part, often less. When the part reaches the end user, it can cost 1000 to 2000 Yuan, sometimes more.  Your 100 Yuan part created  900 to 1900 Yuan in value, and you made only 10. To capture that value, you must move further up the chain and closer to the customer.

There are two markets for parts: There is OEM market, selling parts to makers of new cars or system integrtatoers. Therer is the after sales market, selling parts to repairers of  used cars.  Which market is bigger? Definitely the after sales market. According to projections, approximately 50 million new cars will be built worldwide this year. In Europe and the U.S.A. alone, there are more than 500 million cars on the road that need to be maintained. Which market is growing? Definitely the after sales market. Sales of new cars are going down, especially in the U.S.A. and Europe. Sales of replacement parts are going up, because cars are kept longer and need to be repaired. Which market is more profitable? Definitely the after sales market. It is not unusual that the end customer pays 10 to 20 times the ex factory price of a replacement part. Which market bears more risk? Definitely the OEM market. U.S. automakers are on the brink of bankruptcy.  Several European and U.S. parts manufacturers already had to declare bankruptcy. Last week, the U.S. Treasury Department announced a $5 billion program to help U.S. auto parts makers.

The Chinese parts industry is still dependent on the dangerous OEM market. Why? It is relatively easy for the Chinese manufacturer to sell into the OEM market if price and quality are right. The OEM customer has the manpower and resources to provide assistance in engineering, certification, and quality control.

What about the after sales market? From a price standpoint, the Chinese parts industry is well positioned.  In all other aspects, as discussed in our last column, the Chinese parts industry has a hard time competing with large U.S. and European suppliers. Let's remember why. The after sales market in the U.S. and Europe is controlled by a large number of wholesalers and chains. They would love to buy from you, but for a number of reasons, most don't:

1.) A wholesaler in the U.S. and Europe wants instant on-line access to your inventory and quotes.  Your higher priced competitor in Europe or the U.S. is accessible on-line.

2.) A wholesaler in the U.S. and Europe wants to know instantly whether you are reliable or not. Your higher priced competitor in Europe or the U.S. is a known entity.

3.) A wholesaler in the U.S. and Europe wants to give you a parts number and not more. 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 wholesaler in the U.S. and Europe doesn't want to concern himself with certification requirements. Your higher priced competitor in Europe or the U.S. knows the regulations and guarantees compliance.

5.) A wholesaler in the U.S. and Europe doesn't want to wait months for the product and doesn't want to hold a large inventory. Your higher priced competitor in Europe or the U.S. can deliver overnight, often straight to the wholesaler's customer.

6.) Most of all, a wholesaler in the U.S. and Europe usually doesn't want to concern himself with a large number specialty suppliers. Your higher priced competitor in Europe or the U.S. usually provides one-stop shopping for a large variety of parts. The competitor gives the wholesaler a large year-end bonus if he reaches certain goals.

How can a Chinese manufacturer provide the thousands of wholesalers in the U.S. and Europe with the products and the service the wholesalers demand? The answer is clear: A manufacturer alone cannot. This is a task that needs a united approach.

A number of Chinese manufacturers need to 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. Knowing the Chinese ex-factory prices, and what wholesalers pay abroad, this central warehouse could offer parts at 50% below market, and still create many times the profits a Chinese parts maker currently realizes.

This is a quick business plan:

- Create one brand. Or a small number of sub-brands, for instance for electronics, brakes, steering parts, accessories etc.

- Place the European warehouse into Germany. Not because I'm German. Germany is centrally located. Parts coming from Germany are held in high esteem in Europe. Europe doesn't demand a "Made in China" on the products.

- Stock the warehouse with the parts needed for European or U.S. volume models. The demand can be calculated. In Europe and the U.S. there are exact data about how many of which car of what age are on the roads.

- Focus on fast moving product segments; leave the slow movers to the OEMs. A large European OEM has more than 300,000 items. 70% of their sales are made with only 20,000 items. 50% of the sales are made with just 5000 items. A warehouse stocked with 20,000 to 50,000 items would cover most of the market very nicely.

- Hire European senior and middle level managers - a lot in Europe works on quanxi also.

How the project would be initiated and managed from the Chinese side needs to be worked out. It may need the involvement of a "higher power," possibly an industry association or a government agency. It could be owned by a corporation established in China or Hong Kong.  Properly implemented, this plan cannot fail.  The company could be serious competition for a Bosch, or a Continental-Teves, or any of the large U.S. parts houses which are in trouble due to their high exposure to the OEM market.

Next time: Let's pursue this a little more.

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.