AIAG: Bridging gaps for the Chinese-American automotive supply chain

Yilong Chen, Ph. D.
General Director of Asia Pacific Affairs & Chief Representative in China
Automotive Industry Action Group (AIAG)

Yilong Chen received his Ph.D. degree in System and Control from Washington University, St. Louis, USA in 1984 and joined General Motors R&D Center in Detroit. Dr. Chen is one of the pioneers in developing GM's business in China. As the Chief Scientist and Director of Technology Development and Partnership of GM's China Operations, during the period of 1995-1998, he established and managed GM/Delphi-Tsinghua Technology Institute in Beijing and GM-Shanghai Jiaotong Powertrain Technology Institute in Shanghai. He initiated and managed technology collaborations with Chinese partners for GM. He also launched and managed the GM China Science & Technology award program with the Natural Science Foundation of China. After he came back to US in 1998, Dr. Chen has continuously built GM high level relation with China, and managed technical collaboration with GM's alliances in Japan. Dr. Chen received the GM President Council honor, which recognizes employees who represent the "Best of the Best" in terms of performance at all levels throughout GM. As a GM technical fellow, he led research in the areas of robotics, RFID and supply chain quality in GM Tech Center. He also received the GM McCuen Award, which provides recognition for extraordinary technical accomplishments and their economic impact to the company. Because of his outstanding technical contributions, Dr. Chen was elected an IEEE Fellow in 1999. Dr. Chen joined AIAG in 2006 and currently he is the General Director of Asia Pacific Affairs and Chief Representative in China, AIAG.

 
Optimize supply chain with standards and tools to improve quality, materials management and e-commerce

Gasgoo: Dr. Chen, thank you very much for joining us at gasgoo.com. We know that AIAG is a globally recognized auto industry organization, but it has just come to China not long ago. Can you give us a brief introduction to AIAG?

Yilong Chen: Thank you for coming here to interview me. I know gasgoo.com is well-known in the industry and has done a lot for the Chinese auto parts suppliers. AIAG was founded in 1982 by America's Big Three automakers -- GM., Ford and Chrysler. People must wonder why the three competitors set up such an organization together. Let me give you a simple example, in the early stage of automobile industry, each of the Big Three auto-makers has its technical standards and requirements, therefore many suppliers have to prepare three different sets of products, which would definitely increase production costs on suppliers and these costs would be inevitably transferred to the Big Three automakers. Finally the Big Three realized that despite competition, they needed to establish a unified standard for the supply chain.

However the Big Three could not walk into a conference room to discuss plans of establishing a unified industrial standard because back in 1982 the three companies dominated the American automotive industry and sitting together and talking about cooperation on setting up industrial standard would make them susceptible to antitrust laws. Therefore, they created a nonprofit organization called Automotive Industry Action Group, which has provided a legitimate platform for automakers and suppliers to establish unified industrial standards and to address and resolve issues affecting automotive supply chain. At AIAG, the Big Three can negotiate and discuss standards on quality, materials management and etc. But you cannot talk about prices; if you do, you and your company may be sued for the violation of antitrust laws. Nevertheless it's necessary to have such an organization in the United States. The establishment of industrial standards is good not only for automakers like the Big Three, it is also good for suppliers, not only the Tier 1 suppliers but also the Tier 2 and Tier 3 suppliers.

Gasgoo: So it becomes the world standards for the auto industry after the American auto companies set up manufacturing facilities worldwide.

Yilong Chen: Yes. Headquartered in Detroit, AIAG originally just provided service for the American auto makers. As globalization grows, other companies joined us. Take our Board of Directors for example, we have not only the Big Three, but also American Toyota and American Honda. Besides these OEMs, we also have some important Tier 1 suppliers such as Delphi, Lear, Johnson Controls, Goodyear, PPG, Federal Mogul; we also have some truck OEMs like Caterpillar, and some service providers such as IBM and EDS. Now AIAG has had more than 1500 member companies, including OEMs, suppliers and service providers.

Gasgoo: Even the Japanese companies Toyota and Honda have followed the footsteps of AIAG.

Yilong Chen: Yes. We are still discussing some issues with them. We have a lot in common, but they also have differences from us. However with the globalization and the development of auto industry, we all believe that quality, materials management and e-commerce are essential to the auto industry.

Gasgoo: Can you tell more about the application of the standards on quality, materials management and e-commerce?

Yilong Chen: The standards on quality refer to the quality systems and quality core tools established by AIAG experts. For example, TS16949 is a well-known quality system that defines the requirements on quality itself, materials management, lean production and etc. APQP, PPAP, FMEA, MSA and SPC are major quality core tools. APQP (Advanced Product Quality Planning) and PPAP (Production Part Approval Process) specify how each production phase should proceed. Suppliers always have to consult with OEMs at crucial phases before they can go ahead. In China people just want to manufacture according to the samples and give a price offer. But in automotive industry, they have to care about other things.

Our materials management standard is MMOG/LE which is applicable world wide. MMOG (Material Management Operation Guide) was originally applied in North America only, and Europe had LE (Logistic Evaluation) only. Now Europe has also accepted the MMOG.

Our standard on e-commerce is EDI (Electronic Data Interchange). Some small companies in China may trade with foreign companies just through telephone, fax or email. But if the customer is an OEM that needs to purchase auto parts (there are several ten thousands of parts in an auto) and other equipment, those methods are not enough to facilitate all the delivery and managers may be caught by unprepared faults. But EDI can synchronize the supply chain to achieve automatic incoming and outgoing transactions in time. 

We also pay much attention to working conditions. The aspect seems to be not so important before, but it becomes more and more important now. Last year, a copper mine in Brazil, which operated like a concentration Camp for slaver labors, was exposed by many media organizations. GM and Toyota's international reputations were damaged in this scandal too. We think a corporate citizen should care about its employees' benefits. From the viewpoint of business management, once a problem in the upper reaches causes production breakdowns, the operation in the lower reaches must also be affected. So the Big Three established some requirements on working conditions, health care, safety, materials management and etc.

Gasgoo: Thanks for your introduction. I think after the establishment of the standards, the next step is to let the automotive corporations recognize and implement the standards, and offer trainings and certifications.

Yilong Chen: Yes. In order to promote its standards, AIAG holds trainings for suppliers on TS16949 and the quality core tools and etc.every year. Suppliers must be certified by auditors who have obtained AIAG certificates. AIAG auditor's certificates are valid for three years only and AIAG will renew such certificates to auditors every three years if they can pass AIAG evaluations.

Gap Assessment, Training, and Recommendation

Gasgoo: Chinese suppliers find themselves not only facing language barriers, but also lack the understanding on the systems you mentioned. So they are not clear about how to improve themselves. Since AIAG has come to China, many suppliers are interested in joining AIAG training programs. But they have a question: can we get the OEMs' orders after we pass AIAG certifications? 

Yilong Chen: I think it's natural for suppliers to ask this question because it's crucial to their existence and development. Many suppliers start business from service parts, but if they want to have a better development, they must try to become an OEM supplier. In the past, it's not rational for OEMs to switch suppliers because of the risk on the quality and logistics of new suppliers. Now the pressure of cost reduction forces the OEMs to purchase in China, which offers good opportunities for Chinese suppliers. But there is a problem: on the one hand, the OEMs can't find enough suitable suppliers, so they can't achieve their cost reduction goals; on the other hand, most Chinese suppliers can't obtain orders even if they can offer a good price quote. AIAG is here to solve the problem by helping Chinese suppliers better understand the requirements of OEMs, such as TS16949. However, the trainings and assessments given by AIAG are not a guarantee for them to get an order.

When I came to China in April last year, my first priority was to open a representative office in China. Our mission in China is to develop friendly and constructive relations with Chinese government agencies and Chinese suppliers. We will find out specific requirements that AIAG member OEMs and large Tier 1 suppliers have and help Chinese suppliers meet those requirements. Firstly, we will help the Chinese suppliers understand the requirements of their potential customers (i.e. AIAG member companies) on quality, materials management and e-commerce. Secondly, our experts will make on-site visit to conduct a gap assessment. We will come up with a detailed assessment report telling Chinese suppliers where they have met our standards and where they haven't and we will offer an action plan following the assessment. If the assessment shows that a supplier is qualified, we will recommend it to our member companies and it may be able to enter the OEMs' candidate supplier database. We will also provide many training programs on TS16949, quality core tools, MMOG/LE, EDI, working conditions, Lean and Six Sigma, and some Chinese and English technological documents.
  
Gasgoo: The OEMs and large Tier 1 suppliers also have their own sourcing teams in China, and some have a team large than 100 people. They are also helping the Chinese suppliers. Can you make a comparison between the help of AIAG and the sourcing teams of OEMs and large Tier 1 suppliers in China?

Yilong Chen: That's a good question. To answer this question, I have to first explain the OE sourcing process, which is different from the aftermarket sourcing process. The early stages in an OEM's sourcing activity are primarily focused on the pre-screening of suppliers. An OEM may first select one or two dozens of suppliers via telephone or internet (gasgoo.com for example). Then the OEM would check if these suppliers have passed TS16949 certification; if they have adequate production capabilities and if their financial status is good and etc. After that, the number of suppliers may be shortlisted to five or six. Later, the OEM would ask the suppliers (for example by telephone) questions like these: did you export your products before? did you sell your products to the OE market or aftermarket? And for which OEM do you supply your product?  After that, the number of suppliers may be further cut to two or three.

Next, the OEM would go to the two or three suppliers for on-site assessment. On-site assessment is necessary, because passing TS16949 is only the first step, and that's not enough. Even when a supplier has passed the TS16949 certification, an OEM still wants to confirm if the supplier has actually reached their standards. Experts from the OEM would make a detailed assessment in several days on a supplier's entire production process, from material purchase to the completion of production to  quality control on itself and its suppliers and materials management practices. The assessment questions also include how to react to changed requirements; how to make sure the measuring instrument is always in good condition (if the instrument is not standard, it's useless to measure with it) and what is going on with the interior training and technology research and development. After the assessment on the factory is finished, the OEM will continue to conduct more assessments on price quote, the supplier's production capacity, technological requirements of some specific parts, etc. If everything is satisfactory, the OEM will finally sign an agreement with the supplier. Then the supplier should design and manufacture according to PPAP, APQP and the OEM's other requirements. So that's the whole process.

To answer your question about a comparison between AIAG and OEM's work, yes, the Big Three have very large sourcing team, for example, GM has a team of more than 200 people. But these people are very busy because they have too many parts to be sourced. We can help them on the pre-screening of suppliers by the certification of quality, materials management and e-commerce systems and gap assessment because we are most familiar with these stuff. However, we are not involved in issues like the specific engineering requirements and specifications on auto parts, how to produce and deliver and price negotiations and so forth. In America, we also just help on the early stage. With our help, the OEMs can save much time and effort in the early stage so that they can concentrat on the latter stage.

Gasgoo: So the suppliers must first improve on quality and management before they could obtain orders from the American OEMs. When opportunity comes, they can pass AIAG's assessments more easily and then they can talk about the specific requirements on certain parts with OEMs.

Yilong Chen: Almost like that. I'd like to emphasize on two points. (1) We and OEMs can go to make gap assessment on some suppliers. And now UL is also authorized to do the gap assessments according to the standards of AIAG. (2) If an aftermarket supplier wants to develop in the OE market and they can't easily get the attention of OEMs, they can first come to AIAG for gap assessments, because we know the OEMs' common and some unique requirements. The detailed reports after the assessments are very helpful to suppliers. 

Potential of the Chinese auto parts exportation
 
Gasgoo: China has become one of the most important supply bases for American automakers, and in 2006 China has overtaken Germany as an auto parts supplier for the Unite States. Could you tell me the structure of the auto parts and accessories that China exported to the United States? What's the trend for future exports? For example, Would high-tech electronic products become a new trend for future exports?

Yilong Chen: Most of the Chinese auto parts are exported to North America and Europe. However it is difficult to make a distinction between the US and European markets because leading American automakers like GM and Ford also have huge operations in Europe. Therefore, I have only data of China's auto parts exports as a whole, not for individual countries. Currently, China's biggest single item for export is tire, which accounts for 21% of China total value of auto parts exports. The second largest item is electronic products, representing 17%; these two biggest items are followed by wheels 11%, body parts 8%, trailer parts 8%, brakes 7%, and engines 7%.

Gasgoo: Does this include OEM and aftermarket or OEM market only?

Yilong Chen: I think it includes the both.

Gasgoo: What is the structure of the exported products for OEMs? Among exported products like casting, pressing, forging, rubber, electronic parts, which have more exports than others?

Yilong Chen: For the time being, we don't have statistics that shows the export structure for OEM and aftermarket separately. The Chinese OEM suppliers usually started their business from providing service parts for aftermarket. Their experience and growth in aftermarket have prepared them to become OEM suppliers. As for stable exported products, I think tire and electronic parts should be on the top of this whole list. Global auto sourcing in China triggers the rapid growth of the Chinese auto parts industry. The auto parts exportation may has increased about 100 times in the past 15 years. Now China sourcing is still very promising. But the good momentum is still hindered by problems on quality, materials management, technology R&D, production capacity. The appreciation of RMB is also a challenge. About 95% of the Chinese auto parts companies are small business. There are only 38 large auto part companies and some of which are joint ventures. So most Chinese companies are not competitive in mass production, which is essential for the auto industry.

The majority of China-exported auto parts are labor intensive products. But I think the prospect of China's high-tech industry is very promising. China has an abundant supply of technical professionals and there are more than one million engineering major graduates joining the labor market. In addition, the operation cost of R&D in China is much lower. In Europe or America, a regular R&D team is made up of ten people or so, but in China, you can hire 30 to 50 technicians and engineers. Chinese talents are also strong in creativity. However, average Chinese engineers are weak in the accumulation of technology development, the ability in market analysis, and the ability to choose a particular target for research. Once some leaders tell them what they need to do, setting targets and requirements for them, Chinese engineering team will accomplish their mission successfully. 

Gasgoo: Would the exportation be affected by the appreciation of RMB and lower exports tax rebates? What do you think of the prospect of China sourcing?

Yilong Chen: I think China's trade surplus with the United States and the U.S pressure on China to allow free appreciation of Chinese currency have impacted China's exports, particularly in some labor intensive industries, like garments and toys. I'm not an expert in these areas, but I think these areas are less profitable than in the past. As for China's auto industry, I believe these factors have an impact on China's exports. However, China's auto industry is growing and it is more profitable than other industry sectors. And this situation will not change in the near future. My personal view is that China's auto industry and auto parts exports will be impacted, but I see no fundamental changes in this situation so far. I believe that China's auto industry and auto parts exports will continue to grow, though it may slow down a little bit. 

Gasgoo: do you mean to say China's auto parts export will continue to grow?

Yilong Chen: Yes.

Suggestion for the Chinese suppliers

Gasgoo: Do you have any suggestion for Chinese suppliers?

Yilong Chen: Ok. Now it's the best time for Chinese auto parts suppliers to become an OEM supplier. If you want to become a strong exporter, a global supplier, first, you have to understand the specific requirements of your future customers. Second, you need to take a good judgement on your strength; you have to improve yourself on quality, materials management and e-commerce where your customers are very concerned. Opportunity favors those who are better prepared. AIAG in China will not only support its members' needs, but also help Chinese suppliers improve quality, materials management and e-commerce. Your improvement will help the OEMs cut costs to a great extent, and ultimately help auto consumers buy a vehicle with higher performance-cost ratio. So this is win-win-win. AIAG is glad to help the Chinese suppliers to achieve that goal.

Gasgoo: Thank you very much for your time.

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