Haldex: Sourcing in China grows 50% annually

Theo Lindqvist
VP Purchasing and Logistics
Group Management, Haldex AB


Gasgoo.com: Theo, thank you for joining us at Gasgoo.com. First, can you give us a brief introduction to Haldex? 

Theo Lindqvist: Sure, of course. Haldex is a Swedish company, we act within the automotive industry's different segments, we have products for the various segments of the automotive industry, arranging from four wheel driving systems for passenger cars, we make brake system products that are important for commercial vehicle industry segment that is our main business area representing about two thirds of the company. We make motor valves and oil pump applications for the hydraulic segment as well, for the customers of the off-road automotive industry, such as Caterpillar and so on, those kinds of equipments. And finally we make various spring wire, specialty wire product that we provide the very special high demanding spring wire for, which by the way we also make in China starting last year. What makes our products in all the segments basically united is that we focus on safety, environment and vehicle dynamics. So all our products are targeting at those things.

Gasgoo.com: Since you are responsible for the logistics as well as purchasing, can you talk about something related with Haldex auto parts sourcing in China?

Theo Lindqvist: I just give you some background here first. You can say in the last 15 years, Haldex has grown from about 500 million RMB revenue to about 10 billion RMB or one and a half billion US dollars. During this time, I mean this all happened in the last 10 to 15 years, you can say, 15 years, it has mostly been done through acquisitions, but also through organic growth. We have acquired a lot of companies all over the world all this period, and this purchasing has historically been fairly independently from each other quite locally, in typically the Western Europe and in the United States. In the latter couple of years, we have focused a lot on integrating all these different company societies into becoming one company. group supply function that I'm heading, I'm based in China, but I belong really to the Stockholm Group management office. We now aim at bringing all together, and also consolidating purchasing in doing more purchasing across divisions and company boundaries. Since 2003, we've operated a global sourcing office here in Shanghai, China, today we are a team of a dozen of employees here working together with various divisions at home and typically the western part of the world. In terms of auto parts sourcing in China, it has grown rapidly for us the last several years every year by about 50% growth, more and more sourcing from China

Gasgoo.com: For local use or exportation?

Theo Lindqvist: It is typically for exportation, and we export to Sweden, the rest of Europe, and the United States, and also to Latin America, we have some quite size operations in Mexico, where we take a lot of parts from China too. The kind of parts we have been most successfully so far are different kinds of aluminium die-castings and machine parts. we find that the real benefits in savings are realized when a more value add is made here in China, initially we bought a lot of raw castings and so on, but as we add machining, surface treatment, corrosion treatment and so on, we see that China can deliver a lot of saving coming

Gasgoo.com: What challenges you are facing with during China sourcing?

Theo Lindqvist: We have challenges also working with sourcing in markets more known to us in Europe or U.S., it's never completed for a year or also. but in China of course for us Swedish company, there is a language barrier, and you have practical things such as time zones, that makes really difficult to work with China, because we are here, a dozens of people, but we really work as an extended arm for our divisions at home, so all the divisions, we have 8 divisions that are located in the United States, Sweden, UK, Germany, that's where we have our divisions headquarters.

Gasgoo.com: you met some communication obstacles?

Theo Lindqvist: Communication, but also, that's why we have the sites, so once a suppliers is selected, we have approval paper, we have samples, we have started the sales delivery, then those deliveries are going from China to these locations as I mentioned so, any time there is a problem on time zone, communication, language, culture differences. Communication issues can become really under pressure, and quite severe sometimes. But having said that, I think we've done a great job recruiting in China, we have new great staff here in my office, and we are improving a lot, that's really improved by the divisions wanting to source more and more in China. They think we are doing a good job, and we are delivering good savings by sourcing from China, and our goal is to continuously increase by 50% for the next three years also. And by that time, we will come to a level that we can feel quite comfortable with. We'll set on new targets then, but I think the level we will leverage then will be a level at a aim of keeping, by that much.

Gasgoo.com: During our contacts with Magna, Bosch, or Chrysler for example, they all mention two common challenges they are facing now. One is the logistics, because most Chinese suppliers prefer FOB, but the OEMs prefer the DDP, it's more safe, in the guarantee the quality or things. The other problem is on the quality stability of the products, do you face the same challenges too?

Theo Lindqvist: Logistics is a huge challenge for us actually, as I mentioned just now, because now it's really in the top of my agenda, I think the reason is that purchasing and logistics are added as my responsibility quite recently. We already facing with logistics, but I'm not in full agreement with the DDP strategy, I'm not agreed with that, if you say they prefer DDP. I can say disadvantages of DDP as well. When you use DDP, you pay for the material. You pay like this, you pay for the material that you buy, you pay for transportation, and then you pay export duty on all of that, to pay export duty, also the transportation, which is crazy, we should not pay export duty and transportation. if we only pay for the material, then we only pay export duty on that part, so you get another export duty detail; export duty will be bigger than here, because it is counted at the whole in this higher brace.

So in this case we can take care of the shipments ourselves, we see that because it actually has very big saving working with different third party logistics varieties, and taking ownerships of the parts earlier here in China, and doing the export through a third party. Somehow, many Chinese suppliers take a lot of profit margin on the shipment. now I'm getting used to it now, they say invoices that stay seven and eight thousand dollars forty four they took forty four for the container, from China to the U.S., anyone knows you can buy that for three and a half thousand dollars for

Gasgoo.com: do it yourself?

Theo Lindqvist: I think we are staying in the investigation phase, but as I'm not going to use DDP, I think we can do it cheaper and better by ourselves.

Gasgoo.com: Then how about the stability of the products? Is that a problem?

Theo Lindqvist: Quality is of course an issue, but I think although it's easy to blame with the Chinese suppliers, I think it's quite often also our fault

Gasgoo.com: Your fault, you say

Theo Lindqvist: I mean I think many Western companies come here expecting more savings than the savings you really should expect. I think going forward; we should be focusing on sourcing for domestic use, not for export. I think the export, you know, when you add together the logistics you cost, the increase, cause we have, when we take over shipment here, is then we get higher capital tied up on, our balance sheet becomes bigger, right? Because we have six weeks on a boat, we have material that we have to pay for or deliver for. So on the cost for all that; I know the extensive travel that we do visit the Chinese suppliers from the U.S., since we have the visitors coming from groups every week.

Gasgoo.com: And you make the original for them to do the onsite investigation of the suppliers?

Theo Lindqvist: This sourcing team here is responsible for all the investigations. we check the quality systems, we take the references, we do self-assessments, we do supplier visits, we do cost breakdowns, we really prepare everything as position the material and take thirsty potential suppliers down to two or three. So that when the divisions come, we visit those two or three together, and then we make a decision, the way that are seeing here that we have quality, where we are jumping and leaving from back and forth. Quality, logistics, sourcing, those are three functions we have in this office, and we make a review from these three aspects to every supplier, all three have to say to give a recommendation, all three have to say yes, to our supplier, and issue report that I read or the office manager here read, right now, we don't have an office manager, I'm just hiring right now one a suitable person, all those you have to say yes and an office manager has to say yes. After that we recommend the supplier to the division. This is a small hole there, many suppliers try to get through the hole, one or two of them gets through, and then we introduce it to the divisions.

Gasgoo.com: Based on our understanding, Haldex is focused on the commercial vehicle market. Currently China is the biggest commercial vehicle market. Does that mean you face less challenges here in sourcing because the Chinese commercial vehicle suppliers are better than that of passenger cars?

Theo Lindqvist: I'm not sure I understand the question correctly, but if I don't, then you tell me. We have problems for our passenger car, for our four wheel drive system, to find suppliers here is really difficult, and that is because the customers to us in that industry are much more demanding, they are much more demanding on quality, when we talk about PPM levels for a commercial vehicle, we talk in terms of hundreds, and less than 200 is good, ok… we aim at 50

Gasgoo.com: 50 is impossible

Theo Lindqvist: No, it's not, it's not impossible, while we aim at 50, In the passenger car industry, over than 20 is unacceptable, we aim at zero, zero is the goal for our passenger car industry. The Chinese suppliers are not up to that challenge yet, I think they have quite a far way to go. We are just starting now for the first time to buy some components for the four wheel drive system here, but we'll do that with having a number of sources in the west. For Chinese, we'll do that for some period of time, until we feel more and more safe and secure for that. In terms of commercial vehicles, with the dimension, yes there are customers as of today, are less demanding than the passenger car industry customers. But that will change. I foresee ten years from now they would also be demanding, under 50 PPM, or under 30 PPM. The industry developed that way, they just happen to be 10 years behind the passenger car industry. It's very interesting, in the third phase, you see the off road vehicle industry, they are even behind the commercial vehicles in their demands, so you will really see three step, and they are all moving up to the same curve, but it's 10 years between passenger cars and commercial vehicles, and maybe five years, between commercial vehicles and hydraulic segment. I think the three biggest challenges here are capacity, logistics, and quality in suppliers. Capacity, logistics and quality. We see suppliers are accepting things, leaving you quotations, so on and so force, and then they are delaying projects a lot, that's unacceptable to us, it's really unacceptable, and if we will hurt the supplier base here, because they are damaging the reputation. Many suppliers are damaging their reputations. I have friends at WABCO, at Bosch, Volvo, Autolive, we talked with each other, we all share our experiences, some suppliers are on the black list.

Gasgoo.com: So you never go to them after the experience

Theo Lindqvist: I'm not saying never go to them, but they would have a hard time convincing us to go back

Gasgoo.com: Trust again

Theo Lindqvist: yes, it's all about trust, or it's not all about trust, but trust is important.

Gasgoo.com: When you find a supplier potentially good or qualified, will you send the engineering to on-site to help them do some improvements?

Theo Lindqvist: yes, we have supplier development engineers

Gasgoo.com: SQE?

Theo Lindqvist: yes

Gasgoo.com: So how many people are in your team now?

Theo Lindqvist: that are SQEs?

Gasgoo.com: SQE as well as purchasers and engineers.

Theo Lindqvi: now we have purchasers and engineers of 6 or 7, we have 4 SQEs, and we have 2 on logistics.

Gasgoo.com: So in order to keep your china sourcing 50% annually, you have to recruit more people?

Theo Lindqvi: Not necessarily, I think for the next year, we do not have to recruit; if we have to recruit, the next person would probably be another SQE, because it becomes more and more critical. We will implement and start a very big project for us here next year. It's actually iron casting that we are working, you now. there we will apply a new way of working, which is basically for us. which means that we station the next SQE to supply for, I don't know, X number of weeks, really quality check every shipment before they go away.

Gasgoo.com: Now the RMB is appreciating very much, does that have any impact on your strategies?

Theo Lindqvi: No, it doesn't. I think in the long term, if that continues, china become such an important or a big part of our business, may be it will affect later, but right now, both from sourcing and from the revenue perspective, China is quite small for Haldex. How many percent of our total revenue from china? Less than 5%, and also less than 5% of our purchasing global from china, so it doesn't affect so much. and to well known, it does appreciate against the US dollar, but it has depreciated against the Swedish Krona, which is related with Stockholm company, we are a Swedish company. of course the us dollar is a concern trust, that is depreciating, that is a much bigger concern than RMB is appreciated. We expect RMB to appreciate.


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