Fiat: Reorganize Chinese Business

Mr.Jack Cheng:
Purchasing Director of Fiat China

Jack Cheng, a global auto sourcing advocate, now is responsible for Fiat's purchasing in China. He spent 26 years in Ford Motor Company and then joined Fiat Group. Mr. Cheng has more than 10 year's experience in China sourcing.


The Second Edition of China Sourcing Series 

To Re-build Fiat image

Gasgoo: Some people said that it's Fiat's recovery that stopped Japanese OEMs'advancing in the European market.

Zheng: Fiat took some big actions: Fiat has realigned its production lines and launched some new models. Within the next 5 years, Fiat will launch another 3 or 4 new models. We are producing various products, which are important to us.

Gasgoo: Yes, OEM has to focus on vehicle production and the appeal of its products is a key point.

Zheng: You may have known our commercial vehicle Iveco and Marelli, located in Waigaoqiao of Shanghai, that's our auto parts supplier. We take much account on Marelli since it is still the wholly-owned subsidiary of Fiat Group. I'm also in charge of the sourcing in Marelli. And we also have Teksid producing blocks, cylinder covers, etc. in Zhenjiang city.

Gasgoo: Is it a large company?

Zheng: Maserati and Ferrari, our wholly-owned subsidiaries, both have dealers in China.

Gasgoo: According to data in America, Ferrari sales grew faster in your high-level brands, while Porsche sales fell.

Zheng: Right. The revenue of Ferrari in 2006 was 1.2 billion Euros with a net profit of 150 million Euros, accounting for more than 10% of the revenue, which is rarely seen in the manufacture industry. In general, Fiat Auto Group owns various brands, ranging from sport vehicles to commercial vehicles, high-cost vehicles to lower cost vehicles. Alfa Romeo is mid-high level, competing with BMW and Audi. But the brand is unfamiliar to Chinese.

Gasgoo: Yes.

Zheng: The reason why we are negotiating to produce Alfa Romeo is to bring this mid-high brand to China. We also have Case New Holland whose operations are going well in producing agricultural vehicles, and Comau making mould in Shanghai, Pudong. New Holland originally belonged to Ford which was sold to Fiat. We also have Fiat Powertrain, a famous brand able to produce 2.5 million engines annually used for leisure boats and other industries; it is an important reason why General Motors formed a joint venture with Fiat.

Gasgoo: Did Ferrari's vigorous performance contribute to the achievements of powertrain business last year, or are there any other reasons? 

Zheng: Ferrari is a brand with a long history and Fiat has regarded powertrain as the core product in its development. Actually many OEMs in Europe, except German companies, for example PSA uses our powertrain products.

Gasgoo: What about Britain?

Zheng: Powertrain production in Britain is of small scale, because the manufacture industry in Britain is not very strong. The influential powertrain producers are spread along the Alps, from Munich, Stuttgart, southern France, northern Italy and Torino. Most main companies are in the great Alps regions, spreading to other regions.

Gasgoo: Fiat signed a contract with Chery to supply your company engines. Is low cost the reason of this contract? As we know, your powertrain products are advanced.

Zheng: We'd like to use Chery's engine "ACTECO"to stimulate our powertrain team. We aim to expand to other developing countries. The engines sourced from China may not sell to Italy, but to our plants in Poland, Turkey, Brazil, Argentina or India. This would drive our powertrain team to develop products with more added-value. And Chery's low cost is also our consideration to make us more competitive.

Fiat's headquarter in China is established to intensify management. In recent years, the financial situation in Italy improved. The first thing we can do in China is to establish a global sourcing centre for all our brands, contact factories and local government and change our image in customers' minds.

Our mission is to rebuild our corporate image which depends not only on the joint ventures but also on our way of doing business. In China the first thing we could commit is sourcing. With our accumulating experience in the auto industry, I wish to be able to buy products with high added-value from China to improve our European and American supply chains as quickly as possible. It's a win-win strategy. 

Our investment in China is not limited to Nanjing Fiat, which is only a small portion of us. We hold 60% stock in New Holland Corp, and 100% in Marelli. Comau which belongs to us, producing magnesium alloys. Haveco located in Hangzhou produces transmissions. In Nanjing, we have Iveco and Nanjing Fiat. Recently Iveco turned into Naveco which is still a 50:50 joint venture and mergered Yuejin which produces pick-ups. For Nanjing Fiat, we are making some improvements. The sourcing center is to integrate all our resources. For example if we want to buy glass for Fiat and Alfa Romeo, the quantity would not be very large because the production of them is only several tens of thousands. If we purchase the glass used in Ferrari and Fiat together the quantity must be significantly larger than before. 

Effective Communication between buyers and suppliers guarantees win-win result.

Gasgoo: Previously I also did combined sourcing and found a problem. It seems that all the material can be sourced together, but the standard and requirements of them can differ tremendously.

Zheng: It's a big problem.

Gasgoo: It's difficult for any suppliers to meet all the requirements. Even same suppliers may produce in different factories. The ability of coordination is not high and different factory produce glass in different methods without reducing the cost, even the quantity increased. It's a challenge.

Zheng: This is really a big problem, not a minor one. When I was working in Ford, the requirements for the Lincoln, Volvo and Jaguar, these high-level cars, were different. But because of the establishment of the global sourcing center in China, engineers have the chance to see all the kinds of global products. For example, producing a stamping part, the requirement for Volvo is 120 hours, Lincoln 96 hours, and Ford 72 hours. So after learning this issue, headquarter asked to reorganize a global standard.

Gasgoo: So it is not only the matter of sourcing department, but also the research department.

Zheng: So Ford decided to move the research center to China after establishing a sourcing center here.

Gasgoo: It is the unification of cutting edge research standards. It is easier for them to unify the standards because they are three high-level brands. But it would be rather difficult to unify the standards of Ferrari and of some low-level vehicles, for example, compact cars.

Zheng: Yes, it depends on the platform and sometimes you have to consider the production quantity. Ferrari and Maserati's production quantity per year is only 5700. Are they worth to be compromised or not? But it is certain that many kinds of materials are worth to be purchased together for light-duty truck and passenger vehicles.

So I think it also depends on the business sense. Your company should give some advices to insiders. Chinese suppliers should provide many valuable advices and engineering research service to global auto parts giants. Chinese are clever and beyond to just copy others. When we go abroad and see their products we can raise 10 questions such as why the toolbox made in this way. The design cost in Europe is too expensive. We found that the suggestions of Chinese factory are very good and creative when we asked them to produce certain tools and chassis parts. We saw such things when I was working in Ford.

Gasgoo: Is a company's purchase-orientation procedure smooth? Sometimes, for example its research department refuse to change what you suggested resulting a sourcing withdrawal.

Zheng: Ford fired many people for this issue including research department managers.

Gasgoo: I think it relates to your strategic option. Whether you are willing to accept suppliers'suggestions to improve your products or stick to your design and ask suppliers to follow them strictly without being advised. Ford’s change shows that they attached great importance to China sourcing and reduce costs to improve competitiveness.

Zheng: Right.

Gasgoo: Are there any such pressure in European companies like Fiat? In my mind, the competition in Europe is not so fierce, and it's not strategically urgent to do China sourcing.

Zheng: Right. From 2003 to 2005, the entire Fiat Group changed its mind and attitude after experiencing the danger of bankruptcy. I don't know the situation of Mercedes Benz and BMW. So I have no idea whether the products are approved after being tested in China. But I know most German companies test them in Germany after testing In China.

Gasgoo: So the sourcing chain is extensive.

Zheng: Fiat invited me to join them because I had such experience in Ford. They hope me to manage company in a US manner. I am happy to have a try. So I came here.

Gasgoo: Yes. I think it is very important. First of all, if the whole group did not have this sense, it would be rather difficult to implement.

Zheng: They did.

Gasgoo: I have been observing that Borsch, a Tier-1 supplier, has been operating steadily and making great profits. Actually Borsch started China sourcing a long time ago. Now its quantity of China sourcing may be larger than some American companies' among Tier-1 suppliers. Borsch did this not because of operation pressure. Did Borsch regard China as a low-cost production base strengthening its competitiveness but not dealing with pressure passively?

Zheng: I believe Borsch sensed pressure. Borsch has invested a great deal in China a long time ago, and knew how to take the advantages of low-cost in China. For example, Borsch cooperated with UAES producing ECU in Shanghai. Another point is its technology advantage. Three biggest American OEMs in America and Europe have transferred core technologies to Borsch, including the engine Common-Rail technology. The OEMs provide many technologies to the larger Tier-1 suppliers such as Borsch and Simens.

Gasgoo: Yes. From its financial report, Borsch has a higher profit rate than OEMs.

Zheng: Yes. Ten years ago they had the sense of calling, so they got a better performance. In my opinion, the brands in China's supply chain need to be stimulated by a company like Chery. After all there are not many people engaged in the auto industry.

The RMB revaluation won't affect China sourcing.

Gasgoo: Now RMB has been revaluated, a fact China sourcing has to face. Would China sourcing still be attractive? That is to say, would the speed of cost reduction catch up with that of RMB's revaluation?

Zheng: Actually I do not worry about it. In China, many raw materials are imported. The imported raw materials can be trusted in quality. In fact, only coal in China is competitive. Oil and many ores are imported. 

Gasgoo: Some low-level steel are still worth of being purchased in China.

Zheng: It's true. But most raw materials are a global commodity you can manage. For example, you can buy very cheap aluminum in Dubai, because the main issue is the cost of electricity power. I don't think the RMB's revaluation is a great challenge. The greatest challenge is whether we can enhance the design ability. For example, we bought many aluminum rims in Qinhuangdao or Liufeng. Such products production is actually processed with supplied material. Do they have any added-value? The price of such products can be divided into two parts: the cost of raw material and the added-value in processing. Chinese factories only gain profits from production processes. One consequence of RMB's revaluation is the fewer loss of exchange rate in raw material purchases. So I think the challenge is how to make our products good enough to be sold globally. Now almost all the aluminum rims, car speaker and sensors are made in China.

Gasgoo: So it also related with the managing suppliers? Sometime Suppliers need buyers to help them organize material and production.

Zheng: Once I helped a supplier buy material because I know they are more disadvantageous sometimes.

Gasgoo: Yes. The situation would be better if larger buyers do it. Single Chinese suppliers are not at a strong position in purchasing.

Zheng: So your concern is sensible. But nobody can stop RMB's revaluation, which shows the improvement of living conditions of Chinese people.

Gasgoo: on the other hand, the cost of imported raw materials would be comparatively less.

Zheng: Right.

Gasgoo: Another interesting thing is that the suppliers, now busy producing for booming domestic OEM market, may not have extra production capability for global customers. The challenge is how to distract their attentions or to attract them to cooperate with us.
 
Zheng: Actually there are three kinds of suppliers: wholly-foreign-owned enterprises, joint ventures and local enterprises. In the process of contact, they give different quotations and display their advantages to us, for example, their mass production capability and technology advantages and willingness to follow our directions strictly. I think it's better that each of three kinds of suppliers accounts for 1/3 proportion of your total suppliers.

Gasgoo: Would there be any change in future?

Zheng: I don't think it will change. Actually we are also the middleman; the Chinese factories took orders and foreign manufactures worried. They can cooperate with Chinese manufactures in joint venture when they want to invest in China. It's a win-win strategy for Chinese manufactures and foreign companies to cooperate, only if you can get as many orders as possible from Europe and US, so I don't worry that the domestic suppliers are too busy to accept new orders; No manufacturer would deny orders. At Wall Street, many bankers are eager entering China to invest, each year I receive 4 or 5 such groups intending to invest in China. So we shouldn't worry about the production capability, but should worry about orders.