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China sourcing — the first step toward Fiat's recovery

From Gasgoo.com| October 21 , 2008

Jack Cheng :
Vice President and Purchasing Director of Fiat China

Jack Cheng, a global auto sourcing advocate, is now responsible for Fiat's purchasing in China. He spent 26 years in Ford Motor Company and then joined Fiat Group. Mr. Cheng has more than 10 year's experience in China sourcing.

On June 12, 2007, the Fiat Group China Supplier Conference was held for the first time in Shanghai, after the sourcing centers of Fiat subsidiaries in China has been integrated into a global auto sourcing center in Shanghai. In the Conference, Mr. Jack Cheng expressed Fiat Group's determination and confidence in reviving Fiat in the Chinese market, and announced an aim of at least 1.5 billion euros' worth of sourcing in China. After the conference, Mr. Jack Cheng accepted the exclusive interview from Gasgoo.com.

The Third Edition of China Sourcing Series

Fiat targets 3 million units by 2010

Gasgoo: Mr. Cheng, what is the aim of the China Supplier Conference and what are the key messages that you would like to deliver to the suppliers?
 
Cheng: We have been focusing in China sourcing in these few years and the Chinese supplier network
has grown to a large extent. The auto sales in China this year is expected to exceed 8 million units, and may reach 10 million in the near future. I believe that now is the best time to gear up our auto parts industry and to globalize it. If we fail to build up a global auto parts supply chain in a few years time, the appreciating RMB and some other factors may put us in a disadvantaged position.

Gasgoo: The recovery plan of Fiat Group has been very effective, especially in Europe. Can you highlight the key factors of your successful recovery?

Cheng: In 2004, Mr. Sergio Marchionne was appointed the CEO of Fiat Group and Fiat Auto. Under his leadership, the company has made a dramatic turnaround, and Fiat recorded a revenue of 2 billion euros in 2006 . I think one of the important factors of our successful recovery is due to our internal reorganization whereby mostly young and effective managers were appointed. For example, Luca De Meo, a newly-appointed Brand & Commercial manager, is younger than 40. Another reason is that we have launched some new models, such as Fiat 500 targeting the younger generation. The most important factor to our successful recovery is our product. We can only increase our market share with the right products.

In the past few years, our number of platform has been decreased to four. We assemble high, medium and low-end brands on these four platforms. Grand Punto was launched in 2005 and is now the best selling model in Europe; Bravo which is launched this year is anticipated to achieve great success in many markets. We have some other new models, such as Alfa Romeo 159, Lancia Thesis, Ferrari 599, Maserati Gran Turismo. Our new models are showcasing in most of the auto shows. We will launch more than 20 new models over the next few years. Our success is heavily dependent on our products. Sales is expected to exceed 2.2 million units this year, and reach 3 million units by 2010. 

Gasgoo: Looks like Fiat's internal reorganization and launch of new models have contributed greatly to Fiat's recovery. 

Cheng: I think apart from products and sales, cost management and relationship with suppliers and dealers are also important. The aim of this Conference is to attract attention to the Chinese market and to work together to reduce costs in all of Fiat Group's subsidiaries.

Reviving the Fiat brands in China

Gasgoo: The booming Chinese market has realized a sales of more than 2 million vehicles in the first four months this year, and its double digit growth is expected to continue. Unfortunately looks like Fiat has missed out on this opportunity. What do you think of Fiat's current situation in China?

Cheng: The answer is very simple: There is room for improvement and it's a continuous process. We are reestablishing our relationship with our partner, hoping to achieve a win-win situation. People in China only seem to know the brand Fiat, while actually the Fiat Group has 9 other well-known brands such as Iveco, Maserati, Ferrari and as well as Case New Holland. After the integration of Fiat Group's Chinese subsidiaries, we hope that people would see a new side of Fiat.

Gasgoo: Fiat has announced its plan to sell 300,000 units by 2010. Can we regard this as a determination to succeed in the Chinese market?  

Cheng: Yes, and we will stick to the aim. We hope to use good quality platforms to increase production and sales. As mentioned before, our product is the most important key. Apart from increasing our Iveco production in China, our joint venture with Chongqing Hongyan Motor Co. to produce commercial vehicles has also been kick-started. New products will be launched on a regular basis to strengthen the Fiat brand.
 
Gasgoo: There are three essential factors to ensure the success of multinational companies in
China's automobile industry. Firstly, to collaborate with strong Chinese OEM partners, secondly, to introduce a series of strategically positioned models, and thirdly, to build a competitive supply chain system in China. Let's first focus on the second point -- introducing new models. Fiat's compact car has been very successful in the Brazilian market, but not in China. Why do you think that's the case? In which segments is Fiat more likely to succeed in, when introducing new models in China?

Cheng: First of all, some information on the Brazilian market. Brazil is a country with a population about 188,000,000, of which 50,000,000 people (about 25% of the population) come from the low-income group. As such, we have identified the compact car and subcompact car, such as our best selling Palio and Stilo, to be suitable for this market. These models generally have an average emission of 1300/1400 to 1800cc. In Brazil, only 2 million vehicles would be sold this year despite its rapid growth. China's vehicle sales, on the other hand, would hit the 8 million units mark. We see a lot of opportunity for these two markets to cooperate. For example, Palio has been very well received in Brazil, although it is not very popular in China. We can export auto parts produced in China to Brazil to boost our export industry. On the other hand, new technologies such as the bio-fuel engine can be transferred from Brazil to China to enhance the performance of our compact car. On new models, we have the Grand Punto, Bravo as well as Linea,. Linea has just been launched in Turkey and Bravo in Rome. The new Fiat 500 will be launched in Italy this summer. As you can see, Fiat has a series of new models lined up.

Gasgoo: Can Fiat continue to introduce new models all the time?

Cheng: Yes. I believe that Italian-designed vehicles are famous worldwide. We will not only introduce the compact models in China, but also some of high-end models such as Alfa Romeo.
  
Forging ties with suppliers

Gasgoo: Let's move on to the third point – to build competitive supply system. The price competition in the Chinese market is very tough. Many corporations like GM, VW and Toyota have been localized to a very large extent. When Fiat introduces its new models, how would you go about building your supplier network in China to be cost competitive?

Cheng: Based on my previous experience, in order to be cost competitive, we have to work closely with the suppliers. This has been repeatedly emphasized in the conference. It is extremely important to establish strong partnership with suppliers based on trust and integrity, instead of short term monetary gain. Mutually beneficial relationship should be built to ensure long term collaboration. This is the key to ensure success in the future.

Gasgoo: And is that part of Fiat's strategy? To build a strong supply chain in China, not just to support your global business, but also to give Fiat a competitive advantage in the domestic market when you bring in new models into China in the future. 
 
Cheng: Let me put it this way. The fact that Mr. Marchionne appointed me, a local Chinese, as the
purchasing director demonstrated Fiat Group's commitment in building a strong supply chain through localization initiative. Apart from me, most of the senior managers are also native Chinese. We hope to share the best of China with the rest of the world, and at the same time to attract foreign enterprises to do business in China.
 
Some words for the suppliers

Gasgoo: Multinational companies have not been progressing much in China sourcing despite its effort. We learnt from the suppliers that they are currently facing a dilemma. On the one hand, they would like to export abroad, on the other hand, there is insufficient production capacity to cater for their overseas orders. Do you have any advice for them?

Cheng: I think a lot of attention has been given to the European and U.S. market, making clients in those regions a little arrogant, in my opinion. To truly internationalize their business, suppliers should also look into other countries such as Brazil, Argentina, Turkey, Poland, Russia as well as India. In fact, these are the countries that we are currently exploring. Given RMB's appreciation against the U.S. dollar, expansion into non-US markets would also provide a safety net for our business. In conclusion, opportunities do exist outside of Europe and U.S., suppliers just have to explore.

Gasgoo: Our Chinese suppliers still lack the capability to meet international standards set by the industry. How can they improve?

Cheng: Firstly, communication is important; not just in terms of speaking their language, but also to understand their culture. This is an extremely important aspect that should not be neglected. Secondly, we need to drive creativity and innovation. We will not go far if we continue to duplicate our competitor's product and I have confidence in our local talent pool to create new products and advanced technologies, take for example the development of bio-fuel engine mentioned earlier.

Gasgoo: Thank you for your time.

Cheng: Thanks.

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