BEIJING (Dow Jones)–While slowing demand hurts auto-parts makers in developed countries, the stars are aligning for Chinese auto-parts companies, once considered too inexperienced to supply global auto makers, to increase their share of the global auto-parts business.
China’s emergence as the world’s No. 1 auto market has broadened the market for domestic parts suppliers, enabling them to market to economies of scale. At the same time, Chinese suppliers, whose products have gained in quality and sophistication, can expand cheaply, buying up distressed companies and thereby improving their technologies further.
“China is becoming increasingly competitive” as a source for parts, said Ford Motor Co.’s (F) John Parker, executive vice president for Asia-Pacific and Africa. “The overall quality of products continues to improve.”
China’s parts sector has grown about 30% in size from 2004 to 2008, said Marcus Hoffmann, a member of the management team at Roland Berger Strategy Consultants.
He expects the industry to grow to CNY2.5 trillion by 2015 from about CNY950 billion in 2008, with exports accounting for 30% of parts produced, compared with about 25% now.
In January, China’s light vehicle sales for the first time surpassed those in the U.S. for the month and global auto makers are counting on China to deliver between 5% to 10% growth in sales this year, contrasting with deep sales slumps in the U.S., Europe and Japan. China is also expected to displace Japan this year as the largest vehicle manufacturer.
“In terms of scale of economies, you can’t get better than no. 1,” said Ashvin Chotai, managing director of Intelligence Automotive Asia.
China’s thousands of parts suppliers produce virtually every component. In the past, the industry has focused on commodity-heavy parts such as crankshafts, but has expanded its repertoire into more sophisticated areas such as suspension parts.
Wonder Auto Technology Inc. (WATG) Chairman Zhao Qingji said his company, which makes parts such as alternators and starters, is looking for acquisitions to expand the company’s sales network and improve its technology.
“We want to boost our competitiveness in this crisis,” he said. “In China, capital flow is more abundant, and the government supports private companies going abroad for investments.”
Wonder Auto will begin supplying North American car companies this summer, Zhao said, declining to specify the companies because of confidentiality agreements. Zhao said Wonder is already the sole supplier of some parts to South Korea’s Hyundai Motor Co. (005380.SE) and Chrysler LLC’s local operations and has made inroads with international customers.
As suppliers big and small in developed countries collapse amid the financial crisis, “China will have the most complete industry chain,” Zhao said.
Wonder Auto isn’t alone in looking to grow and gain in sophistication through acquisitions.
According to a study by consultancy firm AlixPartners, 40% of suppliers surveyed said they are interested in domestic M&A deals, while 25% are looking globally.
“A lot of players are still in the market with deep pockets,” said Hoffmann. “For very little money they can buy very good technology at the moment.”
Among thousands of home-grown parts suppliers, some of the better known are Wanxiang Group Corp., which makes universal joints and bearings among other parts, and Fuyao Glass Industry Group Co. (600660.SH). China’s auto components industry also includes a mix of wholly-owned foreign enterprises as well as joint ventures between state-owned enterprises and foreign companies, such as the partnership between Shanghai Automotive Industry Corp. and Visteon Corp. (VSTN).
Visteon, which filed for bankruptcy protection in the U.S. in May, by contrast has seen such strong sales in China that it raised its 2009 passenger vehicle sales forecast to 9% from 4% to 5%.
While suppliers in the U.S. are asking the Obama administration for as much as $10 billion in new aid, in China they see opportunities to expand.
U.S. parts maker Tenneco last week said it had formed a joint venture with Beijing Hainachuan Automotive Parts Co., to make emissions-control and exhaust systems at a plant in Beijing, its sixth joint venture in China. It also operates one wholly owned plant. Initially, the venture will supply the China operations of Hyundai Motor.
The Chinese auto-parts sector hasn’t been immune to global turmoil. Already some companies were phased out amid liquidity problems as demand abroad and in China fell in last year’s second half. Chinese suppliers’ revenue from exports to the U.S. declined 10% in 2008 from the previous year, the AlixPartners study said.
China’s parts industry will look more to its home market this year, which has recovered on the back of government policies and saw sales in May rise 34%.
Meanwhile, the big global auto makers increasingly look to China for parts. In 2008,Ford, which has contracts with local suppliers for components, shipped $2.8 billion in parts from China to its operations elsewhere, mainly in North America. While the figure is a small part of its procurement worldwide, it represents a 10-fold increase over the previous five years, Parker said.
China still lags developed countries for technology-intensive parts such as fuel injection systems and intelligent electronics, but analysts say that is changing.
Many global auto makers either have or likely will move their electronics operations to China, said Andy Chien, president of Ricardo Strategic Consulting in North America.
“The center of gravity has really moved to the Pearl River Delta area and Guangzhou,” he said, adding that developing propriety technology is the next step for Chinese parts makers.
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