Global OEMs likely to double sourcing in China

Gasgoo.com: BCG says global companies usually undergo four stages when engaging in China sourcing. Would you give us a general introduction to these four stages?

David Lee: Yes. Before 2000 or 2001 many companies tended to test the situation of sourcing in China by setting up a sourcing office there and building a small sourcing team.

Then it came to stage 2, when most companies had seen positive results from their pilot sourcing projects and they were eager to roll out multiple sourcing projects covering increasingly broad product categories, but many challenges also emerged in this period, such as the intellectual property rights and suppliers' qualifications.

In stage 3 China sourcing progressed toward what we call "full integration." It's noteworthy that many global companies have set up China R&D and technology centers in recent years, which is an efficient way to provide for local suppliers.

Finally, companies view China as a critical supply base and are shifting some procurement functions there from their headquarters.

Currently most companies engaging in China sourcing are still staying in the second or third stages, with a few lagging in the first stage and some advancing into the fourth stage.

Gasgoo.com: How does the China sourcing of auto industry evolve in the Chinese market?

David Lee: Global auto companies started sourcing in China a little bit later than companies of other industries. Though a few tier-1 suppliers conducted China sourcing even before 2000, it's only after 2002 that these auto giants began their massive China sourcing projects (eg, Ford set up a China sourcing division in 2002, followed by GM in 2003).

The volume of products sourced from China rose sharply in the 2004-2005 period when the export value of Chine's auto parts totaled $10 billion.

Also, many of these automakers have not been able to expand their China sourcing beyond 5 percent of their global procurement spending, while in the electronic industry the percentage is as high as 30 to 40 percent, according to our study.

Gasgoo.com: How many global automakers have set up sourcing offices in China?

David Lee: Almost each major automaker has set up one sourcing center or office in China. I estimate there are around 400 to 500 auto sourcing offices in China now. 

Gasgoo.com: As the media reported, Bosch's China sourcing totaled 300 million euros, 1 million euros in 2007, and is expected to hit 1.5 euros this year. We can see that Bosch has been boosting its sourcing in China at a more rapid pace than other Western companies in this industry.

David Lee: Actually, the 1.5 billion euros is not a big sum in Bosch's budgets for global sourcing. The auto industry has various sourcing types, and Bosch may source a larger number of electronic products, as China is seen as the sourcing base of the world's electronic products. When it comes to sourcing the components of heavy-duty machinery, China is not necessarily more competitive in technologies and costs of these products. That is to say each company has a different size of sourcing because of their different business.

It's the same with carmakers. It is impossible for Ferrari, which is highly demanding in quality and technology, to do large sourcing from China; the China sourcing proportion of Benz and BMW couldn't be very high; as for the GM brands, the China souring for Cadillac wouldn't be more than that for Chevrolet.

Gasgoo.com: The sourcing in China has to face the rising of the Chinese currency yuan, and the surge in raw material costs and logistic costs, as well as the increasingly stringent eco-friendly standards. Will these factors dampen the sourcing enthusiasm of global companies and hamper the country's sourcing industry?

David Lee: The influence is certain to occur and exist. But where else can you go for sourcing if not in China? As a unit of the European Union, Eastern Europe will see the sourcing costs rise. However, you can go to Russia. And in Asia you can go to India and Vietnam, but the backward infrastructure in India and the looming financial crisis in Vietnam pose big problems to sourcing, and the frequent strikes by employees will not guarantee the supply and delivery of goods just in time. Therefore, China remains to be an ideal destination for global sourcing.

China has a larger market than India and Vietnam, and the large market will promote the development of tier 1 and tier 2 suppliers; China has more university graduates each year to ensure the highly qualified human resources or labor force in every industry; China has more good ports and highways for freight transportation and shipping.

However, it is said that sourcing in China is becoming more expensive, why? It's mainly because too many investors have come to build factories in China. Though China has a large working population, it is now not so easy to recruit enough workers. The Chinese government has plans to export more products that have higher added values, such as auto parts, and the labor-intensive manufacturing of low-value-added products for export is no longer encouraged in this country.

The appreciation of China's currency will surely affect the sourcing to some degree, but will not stop it. The value of Chinese yuan has risen more than 20% against the U.S. dollar since July 2005, but it has not appreciated like that against the euro or Japanese yen.
 
Gasgoo.com: When it comes to specific products, China sourcing of what auto parts will be more cost-effective?

David Lee: Harnesses; electronic products. In addition, injection products and pressed parts are other sets of cost-effective products, all of which need tooling units. Our data show that we can save costs 20%-60% by souring the tooling units in China, and save costs 20%-40% by sourcing the mechanically processed units.

China has the capabilities to develop and produce many products, but this doesn't necessarily mean that global companies will do their sourcing in China. For instance, safety parts cannot be sourced from China because the testing and approval will take a long period of time. But many other products can all be sourced in China.

Gasgoo.com: Auto sourcing industry in China is still at the preliminary stage compared to other industries. What is the difference between auto suppliers and suppliers of other industries?

David Lee: The difference exists in technology, manufacturing management and some other aspects. I would like to talk about the manufacturing management. Though many Chinese enterprises claim they are boosting 5S or 6S by learning "Lean Production" (LP), in fact few improvements have been seen in the companies. So I believe there is no LP in China now, and it should be expected in many more years. However, almost every supplier in a mature foreign auto market pursues LP as it is the most needed.

Gasgoo.com: Automakers like the General Motors (GM) help its potential suppliers with upgrading for half a year, so do other intermediary organizations such as Lean Enterprise China (a non-profitable organization). Is it effective?

David Lee: The problem is that it is difficult to change the philosophy of an enterprise compared to the technology improvement. It is impossible for the automakers to help every supplier with upgrading, and the supplier needs to increase its overall competitiveness by itself. I appreciate what global automakers such as GM and Ford are doing for Chinese suppliers, but it is just a kind of transitory help as suppliers for them will be more and more in the future.

Gasgoo.com: Could you predict the Chinese auto sourcing in the coming five to 10 years?

David Lee: I don't think Chinese auto sourcing enterprises will remain in simple processing, but they will become a production base with R&D capability in the future. The global OEMs could increase their sourcing rate in China to 10% by then from current individual 5%.

The increase in R&D investment and expansion to the overseas market are both needed to meet this target. I expect there will be a Chinese auto supplier ranking among the top 20 global suppliers in ten years.