|

Contact Us

Open market helps Chinese parts suppliers globalize faster

From Gasgoo.com| June 27 , 2008

Ivo Naumann (R)
Managing Director
AlixPartners Asia LLC

Jennifer Li (L)
Vice President
AlixPartners Asia LLC

Gasgoo.com: AlixPartners recently released a new study on China's auto parts market. Could you please give us a brief introduction on the subject of the study and the results?

Ivo Naumann: This year we did a specific study on the Chinese auto parts industry, and we interviewed a number of top executives of the Chinese auto parts companies. We find that the growth rate of China auto parts industry has been more than 30% on average for the last five years, and it will continue to grow probably at above 20% for the next five years also.

China has increased exports fairly rapidly, but only 14% of the total auto parts production in China is exported, which means China is not depending on the economy in the US and other markets. Import has also grown, but export did grow faster, so China right now is a net exporter of automotive parts. However, there is going to be some challenges to continue this kind of growth in the export market.
 
First, there is an overall cost increase in China, but that is true for everybody. In export specifically, China is facing a problem with the currency exchange rate between the RMB and the US dollar, which makes it more difficult for Chinese companies to export to the United States. At the same time, the decrease in VAT tax rebates for certain automotive parts makes it harder for Chinese companies to export.

Compared to other major economies in the world, the Chinese automotive parts industry is still very fragmented. There are not yet many large Chinese automotive parts companies. We found only 6 companies are generating more than 1 billion dollar in revenues here in China. So it's a very big industry, but it's not yet consolidated in the sense that you have large local companies in that field, which poses some problems to the local companies, because they do need some economies of scale in order to be profitable.

The Chinese executives we interviewed are somewhat concerned about the future. The No.1 concern they have about is the increase of cost and the exchange rate development. They also feel that they are facing more competition from other low-cost countries, such as Vietnam, India and Mexico. Quite a number of Chinese executives feel that they would like to increase the technology standards of the products in order to avoid the pure price competition. They used to be the cheapest manufacturer in the world, now some other countries are becoming even cheaper, so China is moving up in terms of value added production. Some companies will successfully transition themselves, becoming much bigger and higher value added manufacturers. They will be the winners. And there will be quite a number of companies that will not be able to make that transition, and they would probably the losers. This very large number of companies at the moment in the industry will consolidate over time, it will become a smaller number and some of the companies will become significantly bigger.

We also asked the executives how do they want to grow their business and how do they want to get a better technology. 80% of them mentioned that they are considering some kind of mergers and acquisitions transactions -- half of them said their main target would be doing that inside China; another half said they would also consider of doing that overseas.

Chinese market more open than Korean and Japanese markets

Gasgoo.com: According to the Korean Institute of Economy and Technology, the technology gap between Korea and China is now shortened to around 3.8 years. Also an executive from Hyundai Mobis said, around 2010 the Chinese auto parts makers would catch up with the Korean competitors. However, others say the Chinese suppliers still lack in core technology and innovative capability. What's your opinion?

Ivo Naumann: First of all, it's not true for every company. I think some auto parts companies have already had products that are competitive in the world market. One of the best examples is Fuyao Glass, which grows up in China, but now exports to the top OEMs around the world. They are exporting to the United States, to Europe, etc. Certainly there is no difference of technology between what they can do and what a Korean manufacturer can do. There are also some other examples which is also true. On average it's also true that the history of the China automotive industry is a little bit shorter, and Korea has some edge in technology.

I personally can not exactly say whether it is a 3.8 year or a 2 year or so. However China has a positive momentum. China has been relatively open to invite foreign companies to participate in the market, much more open than Korea, which is always a fairly closed market for foreign auto parts makers. I think China has an opportunity by doing so to catch up much quicker in terms of technology than if they would have chosen the Korean market model. In the sense, I don't know exactly to quantify in what year that will happen, but overall I would expect that first of all, some companies are already very competitive. This is a trend that is going to develop over time. But I think in a certain number of years, many Chinese companies will be just as good as some of the leading companies around the world.

Gasgoo.com: Do you think that Chinese auto parts makers have learned a lot of core technologies from setting up joint venture with foreign players?

Jennifer Li: Yes, for sure for the past several years. As Ivo has just mentioned, it's really depending on what kind of categories. For some of categories, some Chinese companies like Wanxiang are quite globally competitive. But for some of the other categories, maybe it's still quite low technology, lack core technology like engine or engine related components.

Ivo Naumann: Yes, in some commodities China has already caught up, some still have a gap. But I think over time it will diminish. China is such a big market, really no big company can afford not to be here. Every major automotive parts company around the world has to be in China, and ultimately that just helps also to develop the local companies, because employee would probably work first at a Chinese local company, then they would go to an international company, then they would go back. This is kind of a positive development that the skills and know-how are being learned and being infused into local companies, so they catch up. I think again the Chinese model is more successful than the Korean model ever was.

Gasgoo.com: If we compare mergers and acquisitions with slow but steady accumulations, which way is better or suitable for the Chinese auto parts makers?
 
Jennifer Li: Mergers and acquisitions is a quick way to get access to the core technology and become more competitive. But self-accumulation on their technology is also important, even if you use mergers and acquisitions to get that technology, but finally you still need to do accumulation by yourself. From our interviews, many suppliers are considering mergers and acquisitions, but that may not be suitable for all the companies, maybe only suitable for some of the big companies. So it really depends.

Ivo Naumann: That's right. I think in a certain way buying technology by the way of buying a company is certainly very quick, but if you only rely on that, you will still lose out in the market, because the market is going to continue to innovate. If you are just buying the technology, then you think that now you are set for the next couple of years, it's not true, because ultimately the market will continue and the competitors will continuously to innovate and invest into research and development, etc. So I think in a certain way that buying a company and buying core technology is helping to accelerate the process, but there is no way that you can avoid developing your own research and development capabilities; you have to invest in that and an ability of owning your intellectual capital over time, because you have to continue to innovate. So I think it's not either or, but you have to do both.

Chinese parts suppliers globalize faster than OEMs

Gasgoo.com: Nowadays we can see the accelerating inflation, appreciating RMB, increased uncertainty from the global economy and capital market. Will all these adverse factors have any positive impact on China's auto parts industry?

Ivo Naumann: First of all, of course in the short term, what happens is it is hurting some of the companies here in China, because simply costs are increasing, and you can not immediately increase the (product) prices officially. So what you will see in the short term is that there will be some deterioration in the margins of manufactures here. As I mentioned earlier, in a certain way however that is a positive development because also that means you are putting more pressure on these companies, to make their operations even more efficient in order to avoid or minimize the cost increase, that on the other hand it will drive companies to go to higher value added stages of the industry, so that means that you can not reduce the costs that much further, on some points, that comes to an end, so you have to increase your technology capability, you have to increase your brand name and brand awareness, you have also have to probably set overseas networks. So in a certain way I think in a short term, all of these cost increases and foreign exchange fluctuations are painful, but ultimately in the long round it will help because it really drives the companies to perform better.

In that sense, I think that can come into the comparison to Japan in the 1980'st. Japan had a fairly domestic auto parts industry until the revaluation of the Japanese Yen against the U.S. dollar happened in 1985, which put a lot of pressure on the Japanese auto parts companies who previously exported to the US. Then the companies decided that they have to set up their own production base in North America in order to avoid the currency risks. I think you would see the same happening in China. In order to avoid currency risks, the Chinese companies would also start to manufacture in their export markets, and then ultimately they will become a bigger and better company. If now you are a domestic company, and your management is domestic, once you set up a business operation outside in a different country, either in the Europe or North America, your whole management skill improves. You can learn new technology and new management skills, and you bring them back to China, so ultimately that will drive the overall performance on an overall sophistication of industry to higher standards.

So personally I think yes, China will develop into this kind of industry as Japan has done. China would probably do even faster than Japan, because Japan has the problem just as Korea has-- they have a closed market, they did not let that much of positive influence coming in from outside. I think China is always more open in a certain way, so that it will develop faster.

Jennifer Li: Yes, I think exactly that is a challenge, but also an opportunity. The pressure to encourage the Chinese companies to do in that way, and also, maybe especially in this period of time, many of the US companies are in distress and the RMB appreciation will also support to such kind of activity to build up their capability in overseas market.

Gasgoo.com: Before Japanese automakers entered the Chinese market, their auto parts suppliers have already come in China. The Japanese auto parts suppliers have very close relation connection with the OEMs. What's the situation in China? Is there a close relation between the Chinese auto parts suppliers and OEMs?

Jennifer Li: I think most of the Chinese auto parts suppliers start their business with the joint ventures between the Chinese and global OEMs, they have already build a close relationship with global OEMs in China, and especially in this moment, almost all the global OEMs are looking at low cost country sourcing opportunities in Asia especially in China because of very high cost pressure, this provide a very good opportunity for Chinese suppliers to extend their relationship to overseas market and enter the global OEMs' global supply chain. If the Chinese suppliers can improve their capability, control their cost very well and improve technology and quality, I think they would have very good chance to grasp such kind of opportunity. And local Chinese OEMs are the late comer in the market; Chinese suppliers do established very close relationship with Chinese OEMs.
 
Ivo Naumann: I think it's a little bit different how China is structured than Japan. Japan is a much closed market for a long time, and Japanese auto parts companies are mainly focusing on supplying the Japanese OEMs. When the Japanese OEMs want to go outside, they kind of take the suppliers with them. The Chinese case is a little bit different, because the main customers for many of the Chinese auto parts companies are already these Chinese-Foreign joint ventures, so they have already had a relationship even with the North American and European OEMs. The Chinese auto parts companies will become global company much faster than the Chinese OEMs, because Chinese auto parts companies have already had relationships with GM, Ford, Volkswagen, Mercedes, and many others. For the Chinese OEMs, it will be much more difficult, because they can not rely on this kind of relationship with customers. Because they have to build their brand; they would have to build relationships and anything else in overseas markets from scratch. I think in China the auto parts companies will much quickly become global companies than the Chinese OEMs.

"Soft" factors hinder Chinese suppliers' overseas M&A plan

Gasgoo.com: How could mergers and acquisitions help the OEMs into globalization? What could they gain from M&A?

Ivo Naumann: The OEMs obviously can gain a brand, maybe an entry into a market. But certainly there are not that much OEMs that are for sale. There is more opportunity for auto parts companies than for OEMs. It's more benefit and much easier for auto parts companies to do.

Gasgoo.com: What can they gain from overseas transactions?

Ivo Naumann: First of all, they gain technology and additional products. Second, they gain access to customers and sales networks. Third, they may gain a production base in the North American or European market, which can help them deal with currency risks. Fourth, they are getting access to management skills and management experience. 

Gasgoo.com: what's the roadblock for them?

Ivo Naumann: We did ask this question to the Chinese executives. The No.1 concern or road-block for them to do such transaction is that they do not feel comfortable to understand the markets in overseas in depth, they do not fully understand how to manage the company in North America or in Europe; they feel they don't have enough management depth and breadth they could send over people to integrate such overseas companies. So I think most are soft factors, not necessarily hard factors. I don't think Chinese companies have lacking financial funds to do such transaction, I think they have that. They also can have higher advisors in the legal side, but the No.1 concern is how to manage the company in North America or in Europe.
 
Jennifer Li: Yes, after the acquisition, the top one concern is how to integrate. The second one is that they lack international resources to manage those companies. They also don't quite understand the cultures which is very important for people management.

Gasgoo.com: We can see the private equity firms have already made their way in the Detroit industry. For example, Chrysler is improving with the help of Cerberus's Capital Management. Will that happen to the China auto industry?

Ivo Naumann: First of all, it has already happened. There are some Chinese auto parts companies that private equities have already invested in. So it's not completely new for China. It certainly has not happened to the scale like what happened in North American and European market, but already the first cases have been occurring. In China there is going to be more of that. A private equity brings financial resources, which no doubt caters to companies' growth needs. The other way of getting the capital is to list on the stock exchange market. A good private equity investor can provide expertise in overseas markets. Private equity firms have conducted many transactions, they know the local circumstances better, they have access to managers and they can pull into a newly acquired company. Private equity can play a positive role especially for the internationalization. I don't think they always will, I think there are some positive cases and some non-positive cases. But ultimately the really good private equity companies see themselves not only somebody who provides money; they really see themselves as somebody who provides also know-how, managerial resources and so forth. That can be tremendous benefits.

I think if you look outside the automotive industry, a very interesting acquisition is that Lenovo acquired IBM in the United States. In that acquisition, there are actually two private equity firms involved. They only have small shares. But my understanding is that they provide very active and positive role in helping the two companies integrate into each other. That's really what good private equity firm can help. But I think it's important to understand that one really look at private equity investors that offer more than money.

 

 

All rights reserved. Please notify the source for any use.

 

Gasgoo not only offers timely news and profound insight about China auto industry, but also help with business connection and expansion for suppliers and purchasers via multiple channels and methods.

All Rights Reserved. Do not reproduce, copy and use the editorial content without permission. Contact us: khoahocxaydung.info.

https://best-cooler.reviews/

купить аккумулятор Черкассы

| | | |

Site: Khoahocxaydung| | | | |

Copyright Notice © 2017 Khoahocxaydung.info Corporation and its licensors. All rights reserved.