China auto parts have to vie for global sourcing

Gasgoo.com: The global sourcing of auto parts started in 2002 and began to flourish in 2003, but the actual sourcing amounts of many companies are far from the goals they claimed publicly. What reasons do you think have made global companies fail to achieve their sourcing goals in China?

Ray Yu: At first, the top executives of the companies have expected too highly of global sourcing. In their plans, many companies have only focused on the percentage of the overall sourcing amount and thought everything can be sourced in China, without taking specific items into account. In fact, not all things are available or suitable for sourcing in China.

Secondly, in the process of product development, or in the search for such opportunities, they would meet with many setbacks, such as the need to fulfill the existing contracts first, little confidence in Chinese suppliers, prejudice against China, the change of sourcing personnel, and uncertain attitude toward future sourcing. The process is long and the resistance is strong, and these factors will hold back or delay the fulfillment of the sourcing. In setting up their sourcing schedules, many companies seldom consider these factors and the period of time for carrying out the sourcing plans.

Finally, the supply base in China poses another big problem. Previously, about 40% of the auto parts of a complete vehicle could be sourced from China, such as casting parts, electric parts, forged parts, plastic parts, and tooling parts, but now the value of Chinese currency yuan has risen, the raw materials' prices are soaring, and meanwhile the labor force cost is also increasing gradually.

Gasgoo.com: Many Chinese local suppliers have done a good job in equipment investment, some even better than their European and American counterparts, and are likely to succeed in future growth, but most of them lag far behind global suppliers in capabilities. What has created this gap and how to fill them?

Ray Yu: Actually, the equipment of Chinese suppliers is not necessarily inferior to that of foreign suppliers. It is in the management and service that our Chinese companies lag behind. The low management ability lies not only in the technology and process, but also in many other aspects, such as quality and customer service. The scale of a supplier should also be expanded to sharpen its competitive edge.

Chinese suppliers have not entirely changed their old business concept yet and still stay in their extensive and rough mode of operation. They also have much to improve in their cost and personnel management.

Gasgoo.com: They seem not familiar with the demands and regulations of foreign suppliers.

Ray Yu: This is not the case. The fact is they didn't focus on long-term profit. At the beginning, they enjoyed big price advantage from China's low-cost labor force and imperfect labor contract law, which gave them illusions of price superiority. However, as suppliers found the previous quoted price too low with market development, they would raise the price or lower the laborer's salary, which led to workforce instability and supply disruption. What they lack is a stable and consecutive supply capability for customers.

Gasgoo.com: What are the most competitive parts for sourcing in China?

Ray Yu: I think now most sourcing teams have come to know the answer since China sourcing in the automotive business started in 2002. Based on my experience, I think China's most competitive auto components are mechanic parts, electronic parts, and tooling. And once the buyers have found the competitive auto parts in China, they would increase their sourcing of these products, and even source most of their products from China. Some suppliers in China have been supplying more than 60% of a customer's overall sourcing of certain products (mostly electric parts).

Gasgoo.com: Given that suppliers in mature European and American market score 10 points, how many can Chinese own suppliers get?

Ray Yu: Enterprises that can export products are capable of supplying for the OEM market abroad, so they can get seven to eight points as the difference with the foreign market has shortened.

The product quality of domestic suppliers is either similar or even past foreign rivals because Chinese suppliers pay lots of attention to exports. However, the product development only scores one or two points for few Chinese suppliers are really working on product research and development now. For the management sector, the Chinese suppliers can score seven points thanks to great improvement on enterprise management.

Gasgoo.com: How to improve the management, product quality and R&D capacities of Chinese suppliers?

Ray Yu: One thing is for suppliers to keep a stable management team, and the other is to make sustainable improvement based on the team.

Gasgoo.com: Have Chinese suppliers got more help from sourcing companies?

Ray Yu: Yes, many global companies are increasingly employing rigorous development and management systems to groom suppliers for global sourcing, which will help them to improve both quality and processes.

Gasgoo.com: Shall suppliers in East Europe and India pose pressure to China-based suppliers when it comes to global sourcing?

Ray Yu: Absolutely. As they grow stronger, they will erode the shares of Chinese suppliers.

Gasgoo.com: Any signs now?

Ray Yu: Not much. Chinese suppliers are still in the stage of learning and progressing, but the challenge brought by other emerging economies will loom large when they become bigger and bigger.