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| China's auto suppliers now the most profitable in the world. |
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A recent report release by AlixPartners on China's auto parts market has drawn much attention to the country's highly fragmented auto component market. After interviewed more than 50 senior executives in the sector, the study found that "Chinese suppliers are now the most profitable in the world".
As passenger vehicle sales in China surged by a significant 56% to reach 11.7 million last year, profits of the country's auto parts industry almost doubled. The average operating margin of Chinese suppliers are near 10%, twice as much as that of their counterpart in the US and Japan.
The combined revenue of China's auto parts industry totaled Rmb1140 billion in 2009, up by 23% year-on-year. According to China Investment Consulting, the industry output of the auto parts sector could reach Rmb700 billion by the end of 2010.
70% market share seized by foreign manufacturers
However, Chinese domestic enterprises in this sector are not gaining the biggest share. The fast growing China car market has lured a great number of leading global auto component manufacturers in to the market, especially at a time when developed regions show signs of stagnant growth. According to a Reuter report, seven of China's 10 biggest component makers are foreign companies including Mando, TRW, and Bosch. About 70 percent of the auto part market is occupied by foreign or joint ventures. Some analysts believe that comparing to commercial vehicle sector, foreign shares in the passenger vehicle parts segment are even higher, reaching over 80%. In terms of sales scales, most domestic manufacturers are struggling between RMB 50 to 10 million. Only 130 companies in the market reported annual sales revenue value over RMB 100 million.
However, forsmall and medium firms survive in this most profitable market is not a easy thing. Lack of capital investment is turning the industry into a highly fragmented state, with over 15,000 manufacturers, small or large, competing for domestic and overseas orders. The fragmented characteristic of the market comes from a long established practice in the Chinese auto industry: buyers tend to source from a number of parts suppliers instead of buying from one or two.
Rising costs adding pressure
"China's auto market has presented great growth opportunities for auto component makers. The auto part industry could see an average growth of 15~20% annually between now and 2015. However, for Chinese makers, obstacles for growth are still in the way which includes insufficient innovation ability and rising costs for talents and resources." said Li Lihua vice president at AlixPartners Shanghai.
The profit margin growth of Chinese auto part makers mainly comes from the country's soaring auto market and cheap material and labor costs. As costs for labor and resources going up after the crisis, key advantages enjoyed by the sector are about to disappear.
A series of strike incidents have occurred in auto parts factories in China during the past few months. At automotive plants run by Honda, workers are asking better pay and working conditions which make the Japanese car maker to rethink its strategy to us China a cheap production base. In fact, auto industry is not the only industry suffering from rising labour cost. Similar incidents happen from time to time in electronic and textile industry. Furthermore, rising steel and other key material costs, accounting for 50-60 percent of total cost, will further squeeze profit margins.
Moving up the value chain
With the surging prices, products with the "made in China" tags are no longer as attractive to foreign buyers as they look before. Market data from PAC Group indicates that three major auto makers, GM, Toyota and Ford, are all planning on reducing purchases from China this year, which represents a combined of USD 16 billion for the industry.
Lack of key technologies has left Chinese auto components manufacturers at the bottom of the food chain. Many firms are now eying on either domestic or foreign acquisitions to enhance technology strengths. In the survey done by AlixPartners, 41% of these interviewed disclosed that they have plans on domestic acquisitions while 36% said that they are looking for expansion either upstream or downstream.
Geely auto has acquired Australian Drivetrain System International (DSI) last year at the price of USD40 million. As one of the world's largest transmission manufacturers, DSI produces drivetrains for Ford, Chrysler and Sangyong. Source close to the deal said Geely will be adding investment into DSI's transmission systems' R&D activities, including an eight-speed transmission system.
Snapshot of China's auto-parts industry:- The Chinese auto parts market remains highly fragmented due to lack of capital investment.
- Foreign auto parts makers still command absolute advantage in high-tech fields.
- Lack of qualified people is listed as top challenge to suppliers' growth plans, followed by price competition
- Local auto parts companies are rapidly emerging in many fields.
- Major independent parts makers are seeking consolidation within the country or overseas.
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