Analysis: Will domestic auto part producers be able to compete with foreign rivals?

Gasgoo.com (Shanghai) - The development of domestic Chinese auto part enterprises is a topic that is gaining more and more attention, with the recently announced 2011 revision for the Catalogue of Industries for Guiding Foreign Investment focusing particularly on this industry by promoting production and R&D of key auto parts. The revision, which was announced by the National Development and Reform Commission and Ministry of Commerce, came into effect at the end of last month. It signals a turning point for the country, which had previously focused its attention on automobile production.

The policy shift comes at a time when domestic enterprises are far behind their foreign counterparts, with domestic enterprises controlling only 20 percent to 30 percent of the Chinese auto part market. Chinese enterprises are both technologically and financially lacking, and are left with no choice but to focus on non-key auto parts. With new independent companies powered by foreign funds being set up, have Chinese enterprises fallen too far behind to be competitive? Late last month, Gasgoo.com (Chinese), in association with China Business News, conducted a survey of 2,980 industry analysts and experts to answer this very question.

In the first question, participants were asked to identify what they thought was the aspect Chinese auto part enterprises most lacked in. A continuous lack of core technology was the most popular choice, receiving 29 percent of the votes. Despite the fact the industry has grown over the years, the vast majority of domestic companies are still far too small and uncompetitive to develop strong core technology.

Another 23 percent of respondents answered that poor quality control is the largest problem hindering Chinese enterprises. It cannot be denied that domestic companies primarily rely on the low costs of their products to make sales. However, these low costs come at a price, with sacrifices made to worker skill and management expertise. As a result, their quality control is lacking when compared their foreign competitors, leading to sub par production quality and questionable design choices.

Meanwhile, inability to cooperate directly with automobile manufacturers on R&D projects, low brand awareness among the public and outdated management models were the respective choices selected by 16 percent, 15 percent and 14 percent of the respondents. Judging from the diversity of the responses, it seems that Chinese auto parts enterprises are lacking in a variety of areas. Interesting to point out is that several of the issues that they face are likewise encountered by domestic automobile manufacturers. As the latter continues to have problems, the former also suffers.

Will the new Catalogue of Industries for Guiding Foreign Investment policy, which aims to encourage manufacture and R&D of key auto parts, help change any of that? That is unclear as of yet. When asked what effects this policy will have on the industry as a whole, 49 percent of respondents answered that it will strengthen the position of foreign auto part companies in the country, further weakening domestic enterprises. However, 33 percent of respondents said that they believed the policy would help domestic enterprises by aiding them grasp new technology. Another 18 percent answered that it would increase the barrier to market entry for foreign companies, which would also be of benefit to domestic enterprises.

In addition to promoting key auto part production and R&D, the new policy phased out several of the restrictions put on foreign investment. In fact, the policy encourages greater foreign investment for production and R&D of automobile engines, electronics and key new energy vehicle parts.

According to statistics, foreign-funded enterprises hold over 90 percent of the markets for several different auto parts. For the markets of a few select parts, foreign companies have near complete control. For domestic enterprises to break into these markets is incredibly difficult, with even Chinese manufacturers looking to foreign companies for nearly 50 percent of their auto part needs.

No doubt, the new policy will help invigorate the auto part industry, but the odds are still heavily stacked against domestic enterprises. Those most likely to gain from the policy change may be those that have spent time and money on acquiring talent and equipment from overseas.

The third question of the survey focused on these very kinds of enterprises. When asked about Chinese enterprises' efforts to purchase foreign technology companies, 38 percent of respondents answered that it would be very difficult for them to develop core technology in this fashion. A further 37 percent believe that it is unrealistic for them to improve this way, as they lack the necessary requirements. Only 25 percent of respondents maintain that Chinese enterprises would benefit by gaining both state-of-the-art technology and a foothold in foreign markets.

There have been several recent cases of Chinese enterprises directly purchasing foreign firms, such as Pacific Century Motors acquisition of GM's Nexteer Automotive global steering and halfshaft operations and Jingxi Heavy Industries purchase of Delphi's suspension and brake program. These acquisitions have proven to be beneficial for the purchasers, with significant gains made to their competitiveness. However, these sort of acquisitions are not only risky, but out of the question for most domestic auto part enterprises.

Most Chinese enterprises in the industry are relegated to the relatively uncompetitive after sales market. When asked whether or not this situation will change, the majority of participants were pessimistic. 54 percent of respondents answered that they believe that it is highly unlikely that domestic enterprises will break out of this rut within a decade's time. Another 20 percent believe that it will take at least 15 years before any change. Only 26 percent were optimistic that a major change could occur within five years. In a follow-up survey done later, several industry experts echoed the majority opinion, saying that they wouldn't be surprised if the current market imbalance persisted for another 20 years. After all, domestic enterprises are woefully unmatched in several areas.

What domestic auto part enterprises need to do in order to finally be able to compete with foreign competitors and prosper is one of the most pressing issues facing the automotive industry in China. How successful the government and its new policy are in being able to guide them remains to be seen.