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China has most competitive cost base for Magna

Lory From www.Gasgoo.com| March 15 , 2007

The Second Edition of Series of Interview with MNC Auto Parts Suppliers

GAS: ok, thanks for your time to accept the interview with Globalautosourcing.com. The first question is, as we all know, Magna is a giant in automotive parts industry, would you please tell me about Magna’s performance in 2006, especially in China?

Fred Kao: We’ve had a very strong successful year. I think many of our products have been launched here in China. As a very diversified company we’ve now be able to bring all of our products into China to manufacture and to support local industry here. Like for example, mirror System, it’s a major player for all of our customers. Our closure products are very strong for domestic as well as export parts market, seating, interiors, our stamping in body structural system group, power train as well as full vehicle engineering group. So I think that is a really good indication of how we’ve done here. In the sense of all of groups and all of products line have become very active here.

Keith lomason: As you know Magna structured into as actually a collection of ten groups that specialized in different components of the car. And it turn to sever actively here producing parts, the other three groups are specialized in convertible rooftop systems , electronics and exterior components are all in the very active investigation stage that help us into the market here.

GAS: Magna is a very special supplier, because complete vehicle assembly account for more than 30% of your total sales. It seems that Magna have more competitive even than some of the OEMs. So what are the key points that make Magna get success in this business?

Fred Kao: Magna has a long history in this business and it’s very cultivated. I think we could consider it to be four main pillars or special uniques of our company. I think one of the first one that make us successful is the fact that we are much diversified company. We are able to produce a wide range of products as you’ve mentioned, from small part all the way to the complete vehicle. I think the other one we also really emphasize is the fact that you know we are company that has included company culture in charter talks about emphasize on innovation we believe that to be successful in this industry we need to have good products, the right products and right price. It’s a found saying to us. So innovation is the key to us.
And the third one that is very key to us is our cooperative culture. We are very decentralized company that fosters a culture of entrepreneurlism or like a businessman with themselves. This allows us to make quick decisions and make decisions that are good for the company. And this is we have many people who are all quota owners of the company. I think that’s important in this unique culture.
The lastly of course is the fact that as any large supplier, we have a global footprint that helps us to support us around the whole world in North America, South America, and Europe and now in Asia. I think those four areas are key to make us successful.

GAS: Ok, It’s very interesting. You can build a car. Why not you enter into this industry; you can become a carmaker because you have capability to assembly complete vehicles.

Keith lomason: we certainly do and we have a lot of capabilities based on the long history of building vehicles and that give us a unique perspective. You know assembling vehicles is more than just putting components together. Assembly, we can do it well anyway. The background for Magna Steyr and other Magna groups are such at engineering resources and design manufacturing processes. It’s very complete, all the way through to after assembling, doing vehicle testing, and components test throughout the process. So it‘s very involved processes that required lot of capital, a lot of know-how and not very many competitors are able or already to do that. The reason that we do not become an OEM is that our business is really built being a supplier, we look at the assembly vehicle has been the ultimate system. It’s closer to the customer than tire1 until tire 0.5. We don’t want to go this competition without any of our customers. That was A OEM would do.

GAS: But it’s also a potential risk for the complete vehicle assembly business for instance, it’s gone be if the model assembly is not so popular ,maybe it’s stagnated for sells, so what is the perspective as assembly industry and continue to increase share of Magana?

Keith lomason: I think there are several reasons why any OEMs would look at Magana as a potential assembler and for the reasons may be changing or reducing some of our customers. It’s a period of growing with others. The customer situation, the global sale situation, regional sale situation all has an impact on that. As far as if a platform we are building has for sales we suffer, yes that is the risk. that we take with our customer. But Magna is also one of the most active and aggressive suppliers when they come actually going to the OEM final customers, the car buyer and finding out what they what. A lot of innovation that Magna has been able to provide to its customers especially in NA & Europe have been based on our research with the retail buyers. And through that we have a good idea for what we sell or do well, we try and choose our partners wisely in that respect, but also help them understand what their customer want. So we may hopefully supply that engineering products of vehicles. That’s well.

GAS: Magna released a solid 2005 financial report. It is unbelievable that Magna keep on sales growth rate at more than 18%, while its key OEM clients’ market share declined dramatically, which means Magna gain more shares from its US based competitors. Could yo share with us what is Magna’s successful secret? Is it cost, especially labour cost or quality? Technology, service or anythingelse?

Keith lomason: You just answered the question.  As Fred pointed out early, the diversification, the innovation, the unique culture that we have, and our global presence that all contribute to our ability to satisfy our customers’ needs. China represents a unique model that most platforms are producing we consider a nitch volume and the rest of the world, so is changing the period having to change the way to our customers we do business. But being a very entrepreneur company we are exceeding it so far.

GAS: It’s no doubt that china is the most rapid growing automotive market all around the world. But for automotive parts market, Japan is currently double than China. Actually, compare only 1 facility in Japan, now Magna has almost 20 facilities in China, Does it mean for Magna China market is more attrctive than Japan? For a foreign supplier, what are the main differences between the two markets?

Fred Kao: I think that is not to say which is more or less important, but I think from our perspective we view the whole Asian market as a very quickly grow market. There are very different characteristics in which definitely currently right now in Japan where we have our facility that mainly for engineering. Definitely the lever of innovation, technology is a little more advanced in Japan right now still. In China it is rapidly growing. But on the other hand when they come into manufacturing are lust for some very unique key process not be manufacturing in China, can be only be done like in Japan or Korea something like that. China has a much more competitive cost base for the manufacturing, so we look at it’s different reasons for why as to decide what we are going to put in Japan, what we are going to do here in China and so on, but definitely from a manufacturing perspective, China is going to play a more and more important role as years go on, and that will reflect a bit more why there is a growing large number of facilities in China than it is in Japan.

GAS: we also find that Magna has a lot of facilities in Germany, in which the labour cost is very high and big market which similar with Japan. Why your manufacturing facilities in Japan are in very limited number?

Fred Kao: our company was founded and grew in NA, and we grew very rapidly. I jointed the company since 1989. When I joint the company, the company in 1989 was primarily a NA company only in United States and Canada. But later in 1990s, later-90s, mid-90s, Magna chose to expand in Europe so that why you see a huge number of plants in business that we developed in Europe. Now there is a slightly different model in the Japanese model. They don’t manufacture but actually do a lot of engineering in Japan, but a lot of manufacturing is now move to NA, Europe, so again from a manufacturing perspective it’s going to be in NA, Europe and the rest of Asia. Engineering wise we still need to keep very close touch with Japan. And also I can come back to our history, in the later 90s, in the year 2000, in around that time phase; our growth period has already been in Asia. As Peter mentioned early around, in 2002 we started with only 3 facilities in China, and now we have closely 19 facilities in China, so it’s again our history from NA then Europe and now for the decade age in Asia

GAS: Magna’s business now mainly focus on NA and European market, Asian market contributes less than 1% to its total sales. But the point is , Asia , especially China is critical market for Magna to keep on sales growth. So, do you have timetable when Magna’s business in China can account for more than 10% of your total sales?

Keith lomason: I think you’v seen Mr Hogens’ presentation because he publicly stated one of Magna’s goals is to have at least 10% of our global sales from Asian based OEMs, it does not necessarilly mean we would be selling 10% of our products and services to companies in Japan and in Korea and in China, but also to there transplant in NA and in Europe. And based on that criteria, I am very confident to going to reach it. Here in China for example, through the 7 groups currently active, our sale’s growing rapidly and a lot of bases too. The foreign based OEMs including Japanese and including Korean. So it’s something like coordinated efforts, all of our facilities and personel worldwide will continue to contribute to.

GAS: I also think the China market is a fabulous market for Magna because in China the implementage of your diversified customers base strategy is easier compared with Japanese market. What do you think?

Fred Kao: We always believe that’s very important. As we know, if we have good products and good competitive price, we always believed that we are going to be good supplier for customers. At the end of the day there is nothing easy. We always have to continue to work hard, to do better, and to meet the needs of all of our customers. so I would never say what is easier than another. China has unique characteristics and so does the rest of Asia.

GAS: Actually, we expect that Magna will face a number of challenges in China: the big four clients in NA and Europe market whose performance in China are so-so(Except GM), as a late comer, lack of competitive in terms of local talents and local supply base and understanding of China market as well. What is Magna competitive strategy to make you become a leader in this market?

Fred Kao: we believe the key for us of successfully going forward is the ability to hire, to recruit, to develop good local Chinese talents here. As any company we need mix initially some foreign influence and technology and so on. But we also need to identify local talent. So we probably put very high priority right now in our company to go out make sure we find best people and we train them here in China and develop talent pool here. I am very confident, from my experience in dealing with Chinese engineers and managers here. They are hard working and learn very quickly and I believe that by tapping into that talent pool and being able to gain that expertise with them and grow with them we are going to be able to meet the challenges that will be here in China often mixed well. I think that’s the key things we’re really working on. I mean we continue to work on engineering and developing products here that more suit to local industry here and local market here. But overall I think the most important will be human resource.

GAS: what about Chinese local supply base? I mean if your products are competitive in Chinese market, the cost should be considered a force fact. So how to control your cost? You should have very strong Chinese supply base?

Fred Kao: yes, absolutely. Probably the largest part of our company here, obviously rather than manufacturing, purchasing, sourcing and supplier development. I think it’s never easy to most Chinese suppliers. There are different expectations there used to. We are actually working with them very closely to develop them. We understand that to be competitive costwise involved more and more suppliers. But we also need to maintain high quality for customers. So it’s always a balance between the two of working with them and to develop them. but I can say probably that you go to any of our facilities, majority of all of our components, assembly equipment and people are all procure local here so we are very high level of localization in China and we are continue to be going forward. It’s localize to the local suppliers

Heith lomason: I just like add that it’s not only the challenge. It‘s also the opportunity. The OEMs in particular, don’t have the resource to manage the tier 2s, tier 3s and tier 4s, so one of our opportunities is created by heavily young auto industry and young supplier base. We can step in and solve that problem for customers as well. We will take any responsibilities of managing those suppliers so they do not have to.

GAS: we mentioned local supply base, actually, it is an imperative for local tier 1 suppliers to source in China in order to improve its competitive edge. As far as we understand, Magna achieved significantly in China sourcing, would you please introduce your progress of china sourcing and your main achievement? Thanks.

Fred Kao: as mentioned early I think one of the key we have done is to develop immediately the sourcing, we believe that if you follow the value chain we have produced The first thing you have to do is to find the right suppliers and a wide rang of suppliers always need to going to determine the right category. Certain parts we need more choice of suppliers and certain parts we need develop suppliers so one of key objects we have done is with magna is people is to develop the sourcing office and local talent pool. We had lots of suppliers last year and supplier conference here over 200 suppliers attended supplier conference here. Now manage such large supplier base we need a lot of people to deal with them and work with them. Now in a little more mature market like NA, you can just give to supplier, they know what to do 20 to 30 years But in china we have to hold hand a little more to guide them a little more closely so we developed close to 80-100 people in the sourcing activities here primarily looking at commercial terms and as long as we develop one suppliers making sure that they understand our requirements and we also work with them to better understand the increase stabilities. You know it’s a big investment at Magna part. We do not believe and just come here … and get everything. We truelly believe have to put effort. nothing is easy. Put a lot of efforts into working of supply base resourcing into develop them I think that’s the main reason why we had some success for a while Some good success a little well developing sourcing avtivity here.

GAS: According to Magna’s experience, what are the main challenge for global buyers to sourcing in China now? Maybe you can share some experience.

Fred Kao: people always think about language as the big problem. In fact we found the pure language itself isn’t an issue. It’s the understanding behind the language. One of issues is different expectations when a global companies they commonly say you should meet the deadlines. We meet the deadline everything 100%. Maybe local suppliers think deadline means he got 80% is pretty close but it‘s not good enough. So the different expectation is a big challenge. Also there is certain cost models a challenge for us. As you know in other regions in the world, much more matured market, so we can expect the time and time again, the costing level would stay the same. But here in China after developing, we found the fluctuations we have to manage those fluctuations, and expected fluctuation in cost in different things so the other one is also try to balance where do we want to our suppliers to be: do they all have to be along the coastal area that more mature, what’s the point if we want going to inland, to some new areas, less developed suppliers, these are we working on in term of challenge. The biggest challenge we have. I guess bring the quality and understanding of expectation of quality is very important and also working with them to develop more and newer suppliers. It is a big challenge for us constantly. As we grew here, Even 200 supplier are not enough, we constantly need to find more and more. That’s a big challenge for us.

Heith lomason: I think there is a point to stress that almost all the presence here is for the China market, 19 facilities we have 16 manufacturers and facilities and only one of them are set specific for export and its domestic sales is growing dramatically, so our presence here in every aspects, is focus on the domestic market. That means we have suppliers domestic market No.1, if we can do some export help the company overall, but China is a very precarious situation a lot of companies came here with expectations a lot of savings, the exchange rate, the RMB appreciation the cost of living going up, especially wages in developing areas is rising quickly, the cost of going to London we just talked about to the less sophisticated suppliers cheaper region we have other parts associate with doing that, you know it’s not the low cost manufacturing base that is used to be or a lot of people think it still is and a lot of ways challenge any buyers have to understand not just look what’s the quoting today the situation going to be in 3 or 5 years from now will still be competitive.

Gas: thank you.I believe Magna will be successful in China. Thank you for your time.

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