Borgwarner: Increase 10 times within coming 5 years

Mr.Freeman H.Shen : President of BorgWarner China and the Board Directors of all BorgWarner companies in China.

Mr. Shen graduated from Carlson School of Management, University of Minnesota with Master of Business Administration. He also obtained the degree of Master of Science in Engineering from University of California at Los Angeles in USA, and the degree of Bachelor of Science in Engineering from South China University of Technology in China.

From September 2003 to December 2004 he was the Managing Director, Asia for BorgWarner Emission /Thermal Systems. From March 2000 to September 2003 he was the General Manager and Board Director of BorgWarner Shenglong (Ningbo) Co., Ltd. Before joining BorgWarner, he worked for Enserch Energy in US, a Texas Utilities Company (TXU), one of the largest utility companies in the world.

Mr. Shen speaks English, Mandarin, Cantonese, and Shanghai dialect.

Mr. Shen is very active in local community and has been awarded by the government the Zhejiang Province Camellia Award and Honorable Citizenship of Zhejing Ningbo Yinzhou District.

The Sixth Edition of Series of Interview with MNC Auto Parts Suppliers

Driven by Technology, Diversified Customers

Gasgoo: Mr.Shen.Thank you for accepting the interview from Gasgoo.com.  Firstly, please introduce BorgWarner for us briefly.

Shen: BorgWarner is an international auto tier-one supplier of powertrains with diversified customers and we mainly focus on powertrains.

Gasgoo: As per the annual 2006 report of BorgWarner, your business structure is healthier than others who originated in North America. There are few auto-part suppliers that are earning money but BorgWarner had a rather better performance last year. When did you start the strategy of diversification and being successful?

Shen: Thanks for your concern about us. The revenue of last year was 4.6 billion dollars. It reached 5.2 billion dollars including joint venture businesses, which was a great increase. We are healthy because BorgWarner is a high-tech company focusing on powertrains including engine, gearbox and 4WD system and so on. The second reason is diversification strategy, which started 5 or 6 years ago. Our customers scattered globally even in China we also have diversified customers. It’s easy for us to supply for different customers with our high-tech products. We develop new products constantly so the customers of Japan. Korea and North America and China are happy to cooperate with us, which is a prerequisite for diversification strategy.

Gasgoo: You started 5 or 6 years ago? How did you sense this tendency?

Shen: At that time, our top management circle thought that the North America market might reach a bottleneck and we had to break it. We also thought emerging markets were our next target. Korea, then China, then India. We established many production bases and good relationship with our customers, which all contribute to our success.

Gasgoo: There is a characteristic that Japanese and Korean enterprises incline to cooperate with local enterprises. They are like in a fortified castle that outsiders can hardly break into. But you did well in this point in a balanced structure. How did you manage to break into?

Shen: we entered Korea in a joint venture and let local people manage it. We cooperated with Hyundai Corporation to establish a gearbox plant 20 years ago. Later Hyundai retreated from it because of its strategy adjustment so we owned this plant completely. Through joint venture we have learned the operation way and production environment in Korea. We had Korean teams, unified technology and quality standards. In fact the plant’s scale is rather big in the production of gearboxes. It is the only winner of Diamond award for two successive years, with which only two enterprises are awarded globally each year. Even Hyundai Corporation send their quality staff to it to learn us demonstrating our success for that there are few cases that OEM go to suppliers to learn quality control inversely.NSK-WARNER in Japan succeeded, also longer than 40 years. It operates like in Korea: unified technology and quality management and local management team, so as in China. You may see many foreigners working here but they mainly work in quality and technology management and transfer. The management team mainly consists of Chinese or who have Chinese background so we learned the market well. We are successful in this.

Oppotunity rather than Challenge in Fast-growing Market

Gasgoo: The success of Borg Warner lies in diversified customers, expanded market, management localization and high-tech. Contrasted with the advantages of diversified customers and expanded market, what’s the challenges of them?

Shen: The main challenge is response speed. Localization needs time because OEM audits suppliers very strictly, especially for powertrains. Another point we have to provide edging technology to our customers in time so that their programmes can go smoothly or their products get into market quickly. All the OEMs have a quick move now. Maybe American takes three years to develop a new vehicle. Japanese may take two years and Korean and Chinese one year. As an international supplier we are required to develop new products in relative short period to keep up with our customers.

Gasgoo: As we know, BorgWarner entered China in 1993 and there are now 3 plants in China, which is different seemingly from other European and American auto-part suppliers who came to China in the same time and own more than 10 plants. They explained that because Chinese OEMs are not concentrated so they had to build plants close to them resulting in many plants. Presently, what’s the real scale of your plants in China? Why do you have so limited-number plants? Is it due to cautious investment or different strategy?

Shen: Actually we have four plants including NSK WARNER established in 2006. The main reasons are: firstly we are not a labor-intensive enterprise but tech-intensive and capital-intensive one. For example we invested a plant in Ningbo, Zhejiang province. Only one assembly line, worth several millions of dollars. Total line worth about 30 million dollars so it’s hard for us to establish 3 such turbo-engine plants. Tech-intensive requires enough technicians we can’t afford. Moreover, it’s common for powertrains to be localized at last with the biggest risk. So we are going to coordinate with them to build plants in the second and third phrases of their localization. Secondly, we support local brands determinedly. Local brands are emerging in recent years in which we invested a lot. We invested 30 million dollars in the first phrase for the program in Ningbo initiated in 2004, 20 million dollars in the second phrase. It will totally reach 90 million dollars including the third phrase. Now the second is in process and the third will follow. Now we have a full-scale cooperation with Chery and some parts are being supplied and some are being designed. And we also have cooperation business with Geely, Greatwall and JAC etc.

Gasgoo: So now international OEMs are accelerating their localization which may bring BorgWarner a lot of opportunities?

Shen: Yes, we now see two opportunities: one is localization. Many international OEMs are forced to localize most key parts. This would go to powertrains sooner or later. The second is the growth of Chinese brands which is exciting me. Local brands hope we do business with them in the phrase of developing products and provide competitive products which incorporated latest technology. Chery and SAIC are good examples. Why are we interested in cooperation with local brands? Their market is immense. However, international OEMs often limit to domestic market. Local brands do not have such limitation. They are willing to export and go where they can go so potential is huge. And they have strong demands on new and key technologies. The Chinese market is promising and we hold an expectation of our sales increasing 8 to 10 times in the coming 5 years.

Gasgoo: your plants and market share are increasing at high speed. Chinese market is expected to continue this growing momentum for a long time. What are your plan in such market?

Shen: Speed. BorgWarner has launched large resources into China in response to the booming market combined our rich experience of dealing with different customers. The only challenge is to speed up our reaction and resource launch, which are not as easy as getting money from headquarter. All industries are developing fast and automobile industry is difinitely faster. It’s really hard to find adequate skills for us. To solve this problem, we have been training talents and brought European and American technicians to China. We have paid close attention to those works, hoping our speed able to meet the requests of vehicle manufactures.

Holding Core Competitiveness Firmly

 
Gasgoo: what do you think of the future of auto industry in China regarding the trend of market structure? Would it be economic type of saloon cars like European market or luxury type with less concern on energy and environment like the American market?

Shen: I believe it would be economical type reducing emissions like European and Japanese market. China, although a large country, is confronted with the challenge brought by energy consumption as well as environment pollution which is now highly controlled to protect air condition. In fact, middle- and-low-level economy cars are preponderant in China. It is very important for economy cars to control emissions, fuel consumption and cost. BorgWarner’s products are mainly addressing to emissions, fuel consumption, stability and reliability.

Gasgoo: Yes. Energy conservation and environmental protection are not only the core of the BorgWarner’s consideration, but also the trend of world automobile industry. The past focus of Chinese on car body and interior are now shifting to engines and gearbox, which are our original products, that would be a good opportunity for BorgWarner. You mentioned the eight to ten times growth in the next 5 years. And what is your long-term objective?

Shen: Our long-term objective is to become the main supplier of powertrain in China, and our sale is to increase by eight to ten times. It’s true that now Chinese consumers are taking much more account on the performance, emissions, fuel consumption and stability of a car than its appearance and interior. They are more rational than two years ago. They fully understand that a vehicle is a vehicle not because of its decarations but of its moving function, and if the emissions can’t reach Euro-Ⅲ or  Euro-Ⅳ, the cars would not be allowed on roads. So the government policy and self-consciousness gradually encourage the growing demands on performance, low-emissions and fuel-efficiency. All are in favour of us because our products have advantages in steability, reliability, fuel-efficiency and low-emmision and so on.

Promising Outlook for Local Suppliers

Gasgoo: Besides the aim of eight to ten times growth, do you have any other objective, e.g. in research, exportation and sourcing?

Shen: Yes. We decided to establish a research center where about 40 engineers are working presently, and 120 more people will be recruited to do research on engine, gearbox, 4WD and so on in the next five years. Another important objective is to mass source in China to supply our factories in Europe. We have a team of more than 20 people in China Sourcing Office (CSO) for exportation exclusively. We have spent several 10 million dollars in China sourcing, and it’s sure that it will reach a certain big number.

Gasgoo: Since BorgWarner has been sourcing in China, what do you think of the suppliers here?

Shen: There are two kinds of suppliers in China: one is a joint venture or wholly foreign owned companies; the other is China’s local suppliers. We’d like to support local suppliers because they are more reasonably structured and easy to coordinate. It’s very important that they can support us in their development under our help. As a multinational enterprise, BorgWarner knows that local enterprises have developed quicker than multinational enterprises. In the cooperation with us, local suppliers are willing to fulfill our requests at full speed; when their abilities come to a limit, they would let us help them improve quality and technology. Their quality has improved a lot and their structure is reasonable. So we are interested in cooperating with local suppliers.

Gasgoo: How many suppliers BorgWarner is cooperating with?

Shen: We have more than 10 suppliers for our different departments, and they are all for exportation.

Gasgoo: All for exportation?

Shen: Yes, for exportation.

Gasgoo: Very active strategy. Is there any challenge in China sourcing?

Shen: We always believe the biggest issue in China sourcing is on the quality stability. Normally, local suppliers can finish some samples or a small amount of production with no fault; but the quality in mass production would become unacceptable. Modern quality control systems are not adopted in many suppliers whose quality control relies on workers’ technique. For example, they employ the most experienced workers to ensure the quality. But to make a mistake is human, even experienced workers probably would make mistakes in mass production. To solve the issue of quality stability, we now spend much time teaching our suppliers quality system.

Gasgoo: You mentioned the prospect of China’s national brands. For example, BorgWarner has produced front-wheel drive for Chery, and DCT for Roewe of Shanghai Auto. How are these brands’ requests for your products different from that of European and American market?

Shen: They are different in some aspects and the same in other aspects. We find that our products related with fuel consumption, exhaust and performance are sold very well in China market. Actually many products of BorgWarner are the best in the world. For example, every OEM Company in China buys Gasgoo turbo-chargers from BorgWarner.There are two kinds of turbo-chargers: one is Gasgoo turbo-chargers, the other is diesel turbo-chargers. Diesel turbo-chargers have been used in the diesel vehicles and some trucks in China for many years. Gasgoo turbo-chargers are much more difficult to produce and require higher technology than diesel turbo-chargers, because Gasgoo turbo-chargers have higher requirements on the wheels in engine due to the higher exhaust temperature and rotational frequency in Gasgoo vehicles. For example, we provided VW’s 1.8T Audi with the speed of more than 60 times per min, which is rather difficult to reach. A speed of more than 10 times per min has been seldom seen in diesel cars. 70% of global Gasgoo turbo-chargers are produced by BorgWarner. China is fit for Gasgoo turbo-chargers, because most vehicles in China use Gasgoo. You mentioned front-wheel drive; its use is different in the north and south China. Front-wheel drive can be used in the off-road vehicles comparatively popular in north China, e.g. Xinjiang, Tibet, Northeast China, especially in snow weather. Besides Gasgoo turbo-chargers, our DCT (Dual Clutch Automated Manual Transmission) is also very promising, because China is in short of AT (Automated Transmission). China had paid much more attention on engine than AT throughout the history. There have been a great lot of experts on the manufacture and research of engine, but the AT technology is not developed well always. BorgWarner, a brand of a century’s history, produced the first AT in the world and the revolutionary product DCT. It is most effective to produce AT with current large productivity including the staff, equipment and knowledge structure. 

Gasgoo: The last question: China market is booming and can output larger profit percentage with lower cost. We know BorgWarner is very active in strategy. Do you plan to make China an exportation base?

Shen: Till now we’ve not considered it, but I think it would happen sooner or later. We have been increasing productivity to meet the requirements of local and multinational customers in China, but exportation base is still beyond our consideration. What BorgWarner special is that its business has been operating well in Europe and America, while some suppliers are forced to transfer to China after having some problems in European and American market.

Gasgoo: Thanks for your excellent comments.

Shen: Thank you.

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