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

Part VIII: Local auto-parts makers mostly need strategic transition and the embryo of a world-class supplier is likely to emerge in China within a decade.

Our survey indicates that there's little possibility that a world-class supplier of auto parts will emerge from China's auto-parts manufacturers, but with cautious optimism we can say that we will probably see the embryo of a global supplier growing up in China in the next ten years.

The main reasons are simple: the current competition is very unfavorable for local auto parts in China to gain advantages in the OEM market. Here we will describe briefly the major features of a world-class (or global) supplier:

1. It has the tier-1 OEM market as its major market, with some aftermarket products as well;

2. It has rich line-ups of products, and diverse consumers;

3. Its products feature world-leading research and development (R&D) technologies in some fields;

4. Its enterprise has a considerable size;

5. It's highly globalized, with sales, production, sourcing and R&D centers worldwide;

6. It has stable local carmakers as its core customers, and the cooperation with them will bring opportunities for globalization and cutting-edge technologies.

By comparison, China's local auto-parts makers have the common characteristics as follows:

1. Most companies lack variety in their products (many 1-billion-yuan companies only specialize in one single product), and their sizes are also very small;

2. Monotonous target markets (such as only supplying for the domestic OE market, even only for commercial vehicle market or the passenger vehicle market);

3. Low globalization. Some companies are able to sell their products worldwide, but they still rely heavily on the local advantages; most of their valuable products are made in China, and only some of these products are exported to other countries. Their products are not made and sold globally, and cannot achieve the global maximization of the deeper value chains.

4. Almost no Chinese manufacturer has the ever-lasting world-leading technology R&D capabilities;

5. There is no stable global carmaker as a partner to rely on. Although some manufacturers can do OEM business with many global brand carmakers in China, and even can export their products to the foreign OEM market, this is not enough to form a stable partnership. Especially in the global markets, the buyers will not remain loyal if some rival suppliers, such those from India, emerge. Delphi, Visteon, Denso, Aisin, Bosch, Marelli, and Hyundai Mobis have all been driven by the growth of powerful automakers. It still remains to be seen whether such powerful global automaker will be able to emerge in China.  

There are two possibilities that a global supplier will emerge from the local manufacturers of auto parts in China in the next ten (or more) years.

1. In the next ten years, Shanghai Automotive Industry Corporation (SAIC), Chery Automobile or other local automakers in China will be able to reach an annual production capacity of 2 million units of its own brands, and make and sell its products worldwide. In this way, auto-parts manufacturers affiliated or closely related to these carmakers will be likely to develop as the embryo of a world-class company with the support of the powerful automakers;

2. By using the market opportunities from the annual output of 15 million vehicles in China, tier-1 OE suppliers can quickly occupy 60% market share in some product segments and score higher profits, and based on these advantages they can carry out global M&A (mergers and acquisitions) and operations to boost their technical capabilities and global growth. Many Chinese companies are making efforts to this end.   

However, not every company needs to become a global manufacturer of auto parts, but most of China's major local suppliers will face the pressures of strategic transition, even though they don’t seek the large size or great influence. The pressures manifest themselves as follows:

1. Diversification of the products, especially the related products. Many companies specialize in a single product in the OEM market and this will lead to great risk if the market changes sharply. Therefore it is necessary to restructure the product lineup and diversify it to the related products, even entering into similar segments.

2. Diversification of the customers and markets. Some suppliers grow rapidly by serving one or two customers and don't care about the aftermarket nor seek any export market; they even focus only on the commercial vehicle market and have little interest in the passenger vehicle market. This is as risky as specializing in a single product. It is necessary to diversify the customer base to reduce the market risk. Some suppliers specialize in the aftermarket and yet it is difficult for them to become big and powerful.

3. Globalization. Generally, China's suppliers are not highly globalized. Some financially powerful local companies are busy only with the home market and don't know what the global markets are. These companies will finally lose the golden opportunities created by globalization.

In the next five to ten years, China's local suppliers will not necessarily carry out the three types of strategic transition simultaneously, but the transition will be a very obvious trend. The businesses of those companies will penetrate into each other and compete with each other dramatically. 

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)

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

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

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

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