Restructuring of global supply chain blazes a trail for Chinese suppliers

Min She: Senior Director of BBK Consulting Co., Ltd

As a Senior Director for BBK China, Min brings extensive operational expertise to our clients, including 20 plus years of experience in the areas of quality, supply chain, performance improvement and project management.  Before joining BBK, Min spent 13 years with General Electric in both the U.S. and China. He obtained a PH.D in Engineering from Vanderbilt University (US), an MS in Mechanical Engineering from China Academy of Railway Sciences (Beijing), and a BS in Engineering Mechanics from Central-South University of Technology (Hunan). Min is a certified Master Black Belt.

Gasgoo.com: Welcome to Gasgoo.com Executive Interview. I learn that BBK is based in Southfield, Michigan, and has already chosen Shanghai as the Asia Pacific headquarters. Please give us a brief introduction of BBK's business in the automotive sector.

Min She: BBK is an international business advisory firm that provides financial and operational services to Fortune 500 corporations, mid-sized companies, financial institutions, law firms and private equity firms. BBK has a rich history in the automotive industry, thanks to our decades of service to both OEMs and Tier One suppliers. In the automotive industry, BBK's deep knowledge and strong reputation make it uniquely positioned to help companies maintain high product quality levels, while improving efficiencies.

BBK has helped them overcome the challenges of the global supply base through the company's proactive approach and its supply base management tools, such as BBK Ratings, that allow BBK to predict potential supplier distress more accurately and quickly than anyone in the marketplace.  

In 2006, BBK established its Asia Pacific headquarters in Shanghai.

Realignment of supply base is permanent, not cyclical

Gasgoo.com: Most American auto parts suppliers are in danger of becoming significantly distressed financially. What are the common issues for the financially distressed suppliers?

Min She: It appears that the current distressed condition of North American suppliers is a realignment of the supply base that favors developing countries, both from a production volume perspective as well as from cost drivers.  This realignment may be permanent as opposed to cyclical, like what happened before.

Gasgoo.com: Private equity firms have already made their way into the auto industry, especially in the North American market. What kind of influence can they bring to the whole industry?

Min She: Until the last couple of years, auto manufacturers had the power to dictate the deal flow, but now the power has shifted to the private equity firms. The increased presence of private equity means the consolidation of the supply base will continue.

Gasgoo.com: you mean the consolidation through mergers and acquisitions?

Min She: Yes, it will continue.

Gasgoo.com: Do you expect that the American companies still have competitive edge in terms of product and technology? 

Min She: Generally speaking, the products or technologies that currently have significant competitive advantages will continue to remain competitive after restructuring. As time goes by, the suppliers from other regions will catch up gradually, and the gap will become smaller and smaller, no matter whether there is restructuring or not.   

Chinese suppliers could fill market gap with improved product & service

Gasgoo.com: In the course of turnaround from distressed situation, in what degree will it change the global automotive industry supply chain? What kind of roles can Chinese suppliers play?

Min She: In the near future the supplier industry will continue to consolidate. There will be two key effects from this activity:

(1) Supplier profits should improve due to increased utilization;

(2) As fewer suppliers are doing business with more customers, these suppliers will be impacted more by the business performance of all its customers.

For China auto suppliers, it can take the advantage and play offensive in a couple of ways:

- Fill the market gap. As auto suppliers in U.S. are experiencing difficulties in meeting the customer's requirements, their customers (OEM/Tier one, etc.) will have to look for new suppliers. China auto suppliers can step up and fill the needs with improved product quality and more efficient costs. 

- Gain technology advantage and market share with overseas mergers and acquisitions. M&A activity is a quick way by which China auto suppliers can gain access to advanced technologies, increased market share and accelerated globalization.

Gasgoo.com: Now let's take a look at China's automotive supplier industry. There are many middle and small enterprises. The whole industry is large in scale, fast in growth, low in cost, but highly fragmented and lack in core technology. Do they have chance to become world class suppliers?

Min She: Chinese suppliers definitely can become world class, and many are in that segment now. The criteria used to determine world class are typically defined globally as quality, delivery, technology and price. As Chinese suppliers grow it will be critical that they continue to upgrade their infrastructure, workforce, systems, and productive assets (plant, machinery and equipment) to meet and exceed these criteria.

China's auto parts industry needs to overcome some key challenges to become globally competitive and effectively shift the perception from low-cost, low-quality products. Companies can improve product quality through using well-known quality improvement methodologies, such as 6-Sigma, APQP, ISO9000, etc. and implementing quality system and continuous improvement processes.

Service excellence is another area on which Chinese companies should focus on. The supply chain capabilities, particularly global logistics networking, have fallen behind the industry development. High inventory and high costs are typical in the industry. Average logistics costs for parts companies that export is much higher than that of the U.S. and Europe. Companies should improve the supply chain processes and logistics network to drive just-in-time (JIT) manufacturing and increase inventory turns and operating efficiency.

All in all, I fully believe many of them will become world-class manufacturers.  

Gasgoo.com: Another very interesting topic: in 1980's, with the Japanese Yen's significant appreciation, a few automotive companies accelerated globalization while focusing on internal operation improvement and it resulted in the competitive advantages of today's Japanese automakers. Currently, Chinese RMB has also been appreciating and also there is the pressure from accelerating inflation and ever-rising material prices. Could all these challenges bring about similar changes to the Chinese auto industry?

Min She: There are many similarities between the previous state of Japan's auto industry and China's current auto industry, specifically as for currency appreciation, strong domestic demand and strong government support. One key difference is that Japan's automotive industry was already the largest export in the world before the Yen appreciation in 1985, while China's automotive industry still has room to grow before it becomes globally competitive.

On the positive side, today's market is more open and global. China will continue to enjoy the low labor cost, at least in the short-to-medium term. There is a huge young talent pool. Most of the similarities and differences are playing in favor of China's auto industry.

Gasgoo.com: Is it the right time for Chinese automotive industry to globalize now? Will it achieve the same success as Japanese companies did?

Min She: Globalization is one way to increase competitiveness through access to foreign capital, the global export market and advanced technology, which has been an ongoing trend. There is no better time to go global.

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