A Report on the Development Trend of China's Auto-parts Industry (IV)

Part IV: Global sourcing becomes sensible; export and globalization will be one of the growth themes of local manufacturers.

Global sourcing has been a hot topic in recent years and is also one of the reasons why we remain optimistic about China's auto-parts exports. Global sourcing means that a manufacturer sources the components or parts abroad, especially in low-cost countries or regions. The practice of global sourcing has a long history in other manufacturing sectors. In the auto industry, many carmakers or large manufacturers of auto parts in the OEM market would source in low-cost countries. However, large-scale enterprises in the aftermarket have also sped up their steps in global sourcing, and they even source their whole assemblies carrying their labels in addition to the sourcing of auto parts or components.

China is the most important low-cost sourcing destination in the global sourcing of the auto industry. At first, the three carmakers in North America boosted their sourcing in China due to the fierce competition in their home markets, and then the tier-1 and tier-2 suppliers of auto parts, some large European automakers and tier-1 auto-parts suppliers also joined the ranks of low-cost sourcing in China, followed by commercial vehicle makers and engineering machinery manufacturers. Some companies (such as Bosch) with more powerful strategic capabilities began their global sourcing ten years ago and have made remarkable achievements.

Many companies have set up their ambitious sourcing centers in China, the currently hottest destination of global sourcing. In the five years from 2003 to 2008, the combined sourcing value of these companies will reach $200 billion and the number of the global sourcing centers in China will increase to 500 this year. China sourcing has been very hot. Our survey shows that more than 300 buyers in the OEM market have sought suppliers through Gasgoo.com by now.

There are three reasons for the hot sourcing in China: 1) Carmakers and OEM suppliers in North America face extremely fierce competition and have to cut their costs; 2) "Made in China" products abound everywhere and auto-parts sourcing is believed to be as fast as well; 3) The optimistic forecast and publicity stunts of some manufacturers have also pushed the trend.

Actually, the sourcing practice in the past four to five years has not turned out to be as optimistic as predicted, because more than 80% of the companies have not achieved their sourcing volumes or their cost reduction targets by sourcing. The rising Chinese currency yuan and the falling tax rebates for export have brought bigger pressures to the sourcing in China, and global sourcing companies have turned to Vietnam, India, Thailand, Australia, and other low-cost countries or regions.

This phenomenon is mainly created by the following factors: 1) Auto-parts sourcing is highly demanding in design, quality, craftsmanship and language communication, and few local suppliers of auto parts in China can meet these requirements; 2) High-quality and powerful Chinese suppliers have traditionally focused on the domestic OE market, and most of them lack export experience or global communication abilities; 3) As China's auto-making industry has been developing rapidly these years, few auto-parts suppliers have the production capacity to do the global business; 4) Some Chinese suppliers have no vision of long-term strategies and pay little attention to the export market. As a result, many opportunities have been missed in this wave of global sourcing in China, and such olive branches will not be always held out to the Chinese suppliers in future.

Today, global sourcing companies have become more sensible and pragmatic about sourcing in China. They have decided to choose and cultivate their potential core suppliers, to boost the integration of their logistics, to communicate more with Chinese joint ventures to raise their enthusiasm for export, and to diversify their sourcing destinations by comparing China's suppliers with those in other emerging markets. All these measures will help drive the sourcing in China onto the healthier track.

It is our analysis that although global sourcing companies have become more sensible and practical about sourcing in China, export and globalization will continue to be the central theme of China's local suppliers of auto parts in the next ten years for the following reasons:

1. Auto-parts industry is a global business. It is necessary for Chinese suppliers to raise their awareness of globalization, and some of them who have tasted the fruits of global sourcing have sent a positive signal.

2. The competition between Chinese auto-parts manufacturers, even those in the OEM market, has become increasingly fierce, and globalization will be one of the ways out for achieving diversification.

3. With years of rapid growth, many OEM companies have reached a 1 billion yuan ($143 million) scale of business and have some financial ability to explore the global market.

4. Joint ventures or foreign companies will also boost their exports to make China a real "manufacturing center" of the world for a virtuous cycle.

We have judged that export and globalization will be one of the growth themes for China's auto-parts manufacturers. The mode of globalization will go through three stages with the enhancing of capabilities and experience:

1. To cooperate with global sourcing companies in their sourcing in China, selling products to them, and the export operation and logistics will be carried out by the sourcing companies.

2. To set up sales and service agencies in the destination OEM markets, build your own logistics centers and storehouses to sell products directly to the users and realize global sales and marketing by taking advantage of the low-cost production in China.

3. To set up or acquire assembly plants in the areas densely populated by your target consumers, and the core components or parts are imported from China, and this will carry out the global operation of production, partial sourcing, marketing, service and logistics. However, this mode is very difficult and will not emerge on a large scale in the near future.

Related:

A Report on the Development Trend of China's Auto-parts Industry (I)

A Report on the Development Trend of China's Auto-parts Industry (II)

A Report on the Development Trend of China's Auto-parts Industry (III)