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Shakeout looms for US automotive suppliers

By Charles Child, Automotive NewsA Crain Communications publication Shanghai, China-US suppliers still are flocking to the People’s Republic of China, attracted by low manufacturing costs and the country’s vast potential. But they are entering a marketplace which is even more competitive than just a year ago. A shakeout of suppliers in China is inevitable, said executives and industry watchers.Until now, the rapidly expanding market absorbed nearly all parts made in China. But, in the next five years, “more than 20 percent of suppliers” will fail, according to Keith Lomason, executive director of Magna International, China. He spoke at the 19-22 April Automotive News China Conference held in Shanghai.The tough competition also is creating a vicious circle. Competition is prompting parts makers already in China to seek export opportunities, which is likely to lower global parts prices and, in turn, will put more pressure on US suppliers to move to China.A few numbers show how the market has changed. In the first quarter of 2004, auto sales in China grew 45 percent. But analysts say sales this year will grow just 10 percent, perhaps 15 percent at best.Ten percent growth is healthy by US and European standards. But various forces are draining profit out of China.Chinese consumers are snapping up low-margin small cars this year. Two years ago, large cars, such as the Buick Regal, were the fastest-growing segment in China, said Troy Clarke, president of General Motors Asia Pacific.GM had profit of about $3500 per Regal, according to Michael Dunne, an automotive consultant based in China. But this year, small cars, such as the Chery QQ, are the hottest sellers, Clarke said. The QQ’s price starts at about $4000.Lower marginsThe sales slowdown has prompted price cuts nearly across the board, reducing profit margins. Competition is stiffer, too, because carmakers are selling more light-vehicle nameplates in China this year – 125, as against 95 in 2004, said Dunne, president of Automotive Resources Asia Ltd.With 125 nameplates dividing an annual light-vehicle market of about 2.5 million vehicles – that’s an average of just 20 000 sales per nameplate – so a rigorous profit proposition exists for even the hungriest Chinese carmaker, said Dunne.Another problem is supplier overcapacity, driven by growth projections that proved too optimistic.”Obviously we have overcapacity in China today because we were gearing up for a steeper growth curve,” said John Jones, vice president of Asia-Pacific operations for TRW Systems Consulting Services (Shanghai) Co. “Since August of last year, we’ve started to shift over to exports.”TRW makes various products in China, such as air bags, seats belts and engine components. Some initially were planned only for export.Export possibilityMetaldyne Corp. chief executive officer Tim Leuliette said his company has built capacity in China to serve only China. But, he added: “Could we export? If we have to, we could.”Long-term trends for China’s auto industry are clear, Leuliette said.”Anyone who doesn’t view China as the dominant auto exporter in the next decade is misleading themselves,” he said. “Not only in engines, but also in vehicles.”Suppliers everywhere must evaluate which customers to do business with.”Part of our strategy is what I call ‘pick the winners’, ” said Steve Meszaros, general manager of Yanfeng Visteon Automotive Trim Systems Co. The strategy goes beyond deciding which products to focus on, to asking how stable a customer is.”Clearly, there are some companies that won’t survive,” he said.So, in the looming shakeout, who will prevail? Will it be the China operations of US and European companies, or indigenous Chinese companies? Trends favor the multinationals.Ready for shakeoutChina’s government is eager for a shakeout. The automotive industry policy issued last year mandates that vehicles meet emissions and fuel-efficiency standards.Those that don’t can’t be sold in China.The government hopes that action will help drive marginal automakers out of business and encourage companies with advanced technology to come to China, if they aren’t already there.And this year, the government intends to put more teeth in the regulation, with a new import tax policy.This policy makes it extremely expensive for car companies to continue to import advanced components and systems.As more world-class suppliers start producing in China, local suppliers that can’t provide the same kinds of products will be driven out of business, the government hopes.Consultant Dunne said not to count out indigenous Chinese suppliers in the coming shakeout.”Don’t underestimate the resolve of the Chinese to establish their own industry,” Dunne said.Automotive News reporters and correspondents Norman Thorpe, Alysha Webb and James B. Treece contributed to this report.”



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