Affinia, late comer eyes long run in China

US-based aftermarket supplier Affinia entered China in January 2006, and set up a representative office in Shanghai. Mr. Richard Pizarek, Vice President & General Manager of Asia Operations, Affinia Group, told Gasgoo.com that, though a late comer, Affinia sees great opportunities to grow in China. 

Gasgoo.com: First of all, please give us a brief introduction of Affinia's Asia operation during the past years.

Pizarek: We started a representative office in Qingdao (Shandong) in January 2006. We then closed it and opened the representative office in Shanghai in July 2006. I arrived here (the Shanghai office) in March 2007.

In the early stage, the function of the representative office was only to support our sourcing in China. Now we have three major responsibilities: to manage the supply base and support sourcing, to make preparation for selling Affinia products in China (i.e. market development), and to start joint ventures or strategic alliances with suitable companies.

During the fourth quarter of 2008, we finished our first joint venture here (Affinia purchased an 85% ownership in Longkou Haimeng--one of the world's largest drum and rotor manufacturing companies). And we've also been working on other opportunities over the last two years, identifying prospective partners and suppliers.

In addition to that, we have two joint ventures in India, and I'm on the board of directors of one of the joint ventures. We don't have any representative office in India, but we have two companies (one was put into production in late 2008, the other one was started about 25 years ago). The latest joint venture in India is 50:50, between Affinia and MAT, both American companies. MAT, with manufacturing facilities throughout the world, has supplied brake system components to Affinia since the 1990's. I'm planning to double our Shanghai personnel and open a representative office in India this year.

Gasgoo.com: Tell us more about the deal with Haimeng. Why you change your mind to buy an 85% ownership in Haimeng and are you going to consolidate the supply base?

Pizarek: We've been working on consolidations for all the time. We've started the group-level restructuring programs since 2005. We have closed 41 facilities during the last four years and have shifted some of our manufacturing base to countries such as China, India, Ukraine and Mexico.

I should say, it's not "change the mind to buy Haimeng". I had been working on potential joint ventures with other companies in China during the past two years. We kept and will keep being the manufacturer of the products. We look at to have strategic alliances with companies in each of our major products lines.

Why it's a 85% ownership rather than 100%? We wanted the current owner to retain some of the business as he built Haimeng into a very successful company. We do intend to grow the company with non-Affinia business.  We support Haimeng to explore the overseas market, whether it is in Europe, North America, Asia, etc. They already sell throughout the world and we would like to see them grow that portion of their business.

Gasgoo.com: You want to sell products in China, but don't you think it's chaotic and very fragmented?

Pizarek: Yes. But I think the way it's organized will change, so it won't be always like this. I believe it will change. We are in this for the long run. It took the North American aftermarket decades to organize like it is now, so I don't expect the Chinese aftermarket to organize like the American and European markets in five years!!

Just look at the car parc. The car population really exploded during the past five or six years. Most of the cars used to be government cars, but now more and more private owned cars are running on the roads. I'm a believer that the aftermarket business will evolve just like the car business-there're around eighty car manufactures and there won't be so many very soon. The same things will happen in the aftermarket business, whether it's forced to happen or it will normally happen. As the number of vehicles in operation and the average age of vehicles increase, there's going to be an evolvement in the independent aftermarket business. Today most of the people go to the 4S shops to repair and maintain their cars; they generally won't go to the roadside garage/workshops which don't have reliable service and reliable parts. But in America, only 20% of the car owners will go to the dealerships (the percentage is above 60% in China).

Aftermarket suppliers like Affinia (as well as some of our competitors here) believe this: there's going to have substantial performance improvement in the independent aftermarket; there's going to be lots of alternatives for the 4S shops to provide less expensive but still quality products.

In America, we're an aftermarket manufacturer; we distribute our products to our customers. In China we have several alternatives sell our products to distributors, sell our products to stores, or have our own stores. We probably won't open repair shops as that would be a deviation from our main business.

We're transitioning the function of our Shanghai representative office; we want to develop the reputation in China like we have in the rest of the world. We hold the number one market position in North America in filtration and brake products and the number two market position in North America in chassis product sales. We have the opportunity to be someone unique in the China market.

Gasgoo.com: Did you have some trouble with your key accounts as the auto market in America and Europe was sharply down?

Pizarek: Fortunately Affinia is almost predominately an aftermarket supplier (it'll be very bad if you have OE business in America, which was down 40 or 50 percent). But the aftermarket was also down as the consumer's spending was at the lowest levels in recent history.

But there're some positive indicators: the miles driven increased due to fuel prices going down, which is not that high any more; consumer confidence remains low level, so people will delay in new car purchases  and increase in replacement parts; they will go to our customers to buy some product to fix their cars; also approximately 900 US dealerships closed last year and 1500 or more are expected to close this year, which means that people are more likely go to the independent aftermarket where Affinia sells its products. We reshaped our cost structure and this makes Affinia more competitive. These indicators tell us that there's a very good picture in the US business; although the business is a little bit slow in the first quarter (2009), we still expect the increase in demand will materialize in the coming future.

Gasgoo.com: How much does the North American business contribute to the total revenue?

Pizarek: Around 48 percent. We are much more globally diversified than ever before. The aftermarket has also experienced increased price competition from manufacturers based in China and other lower cost countries. We respond to this challenge by setting up local production in these markets. We have manufacturing facilities in Mexico, Brazil, Poland, India, China and so on.  If you want to be successful in the local market that you serve, you have to localize your product as much as possible.

Gasgoo.com: What makes Affinia unique?

Pizarek: Today many aftermarket suppliers of these products don't make the full range products. We intend to imitate what we have done in the rest of the world: we will make all brands and types of the products as long as there are the cars. We don't focus on certain range but we make all so that our distributors don't have to buy from different people because they know and trust Affinia has the good quality, competitive price and the whole line. One of our big customers in America is NAPA; they buy most if not all their chassis, filter, and braking products from Affinia.

The expectation of quick turnaround times for car repairs and the broad proliferation of available part numbers require an investment in inventory and strong fulfillment capabilities in order to deliver high fill rates and quick cycle times. We do so. We have a very strong distribution network; we manage it ourselves

When I say competitive price, it doesn't mean the lowest price. There's a lot services we offer that our customers look for; we offer the promotion support, technical training and so on. We have our own technical capability, like engineering and testing facilities. Many of our competitors don't do that; they just buy the products from lower-cost centuries companies and resell them in America. They may even never visit the factories (where the products were purchased). But over the time we want to have more alliance like we have with Haimeng; this is Affinia's way. We generally make the products we sell.

Gasgoo.com：What if you make an analysis on the weakness as for exploiting the Chinese market?

Pizarek: To me, the biggest weakness is that we're just arriving. We are a little bit late than our competitors who have similar businesses of brake, chassis and filtration. It could be overcome, but wouldn't be nice if we arrived here five years ago? Actually Affinia had other properties at that time, too: we have a history of over ninety years, but the name "Affinia" is just five years old (Affinia Group was founded in late 2004); we were busy carrying out our restructuring plans. In China, we started from the very bottom; we didn't have any resources at the very beginning. But that's also exciting for us.

Doing aftermarket business, you never know what sells tomorrow, but in OE business, you can clearly know what's being ordered. You can only align your capacity based on forecast. In America, we have a long term history（of operation）so we rely on the history. In China, we don't have that history, so it would be more difficult for us to predict the market.