capability building in china’s auto sectorcountries producing a million or more vehicles in 2006...
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Capability Building in China’s Auto Sector
Loren BrandtDepartment of Economics
University of [email protected]
University of Michigan China Automotive ConferenceApril 9, 2008
Outline
Historical BackgroundTrends and Driving forcesLooking Forward
Development of the auto sector in ChinaImplications outside
Development of China’s auto sector must be viewed in context of larger process of capability-building in Chinese mfg that is affecting every sectorKey: Combination of domestic and foreign sector reforms that have encouraged FDI, increased competition, forced firms to invest incapability building, and facilitated the transfer of tech and managerial know-howProcess has integrated the Chinese economy to an unprecedented degree into the international economy for an economy of its size and population
• China has become an integral part of global supply chains;• Major importer of intermediate and capital goods;• Major exporter of mfg goods
Important role of rapidly expanding domestic market, which has become focus of increasing number of MNCsEmerging 100% Chinese owned firms in nearly every sector
Basic Message (General)
Accelerating competition in car market having significant impact on OEMs and domestic supply chain
WTONew entry; Expansion in capacity
Rapid improvement in supply chain, but uneven Quality levels of 1st tier suppliers comparable; last few years, most noticeable among 2nd tier suppliersProductivity appears to be rising
Exports of parts and components rising rapidlyMNC …. Global supply chainsDomestic firms …. After-sales market
Rising capabilities in product development and design among some 1st
tier suppliers; often tied to strategies of the OEMs; some OEMs developing similar capabilitiesEmergence of domestic OEMs having significant impact on industrydynamics
Basic Message (Auto sector)
Historical Background
Key Policies in 1980s and 1990sEncouragement of FDI in industry
OEMs, entry limited to that through JVs for autos; e.g BAIC, SAIC, FAWno restrictions for auto-parts
Local content rules for autosHigh protective tariff on the industry
Nurtured emerging industry, and facilitated transfer of technical and org. know-how, but
Notable failures (Beijing Jeep and Guangzhou Peugeot)
Regional heterogeneity reflecting differences in local political and economic institutions (Thun, 2006)
1999: Total Vehicles, ~ 1.8 mnPassenger car production, ~ .6 mnJVs: two-thirds of passenger car production
Key Trends
Rapidly rising volumesDeepening supply chainRising exportsUpgrading of capabilities by both OEMs and suppliersEmerging domestic players
Countries producing a million or more vehicles in 2006
Country 2000 2006 % change
Japan 10,144 11,484 13.21US 12,770 11,264 -11.79China 2,008 7,189 258.02Germany 5,526 5,820 5.32South Korea 2,858 3,840 34.36France 3,351 3,169 -5.43Spain 3,032 2,777 -8.41Brazil 1,671 2,611 56.25Canada 2,961 2,572 -13.14Mexico 1,923 2,046 6.4India 867 2,020 132.99UK 1,813 1,648 -9.1Russia 1,203 1,508 25.35Italy 1,738 1,212 -30.26Thailand 458 1,194 160.7
1. Rising incomes and increase in demand for passenger cars
2. Intense competition in final goods market →sharply falling car prices
3. Cost pressures throughout the supply chain similar to those in the West
Driving Forces?
Competition in the final goods market
• Tariff cuts on passenger vehicles (WTO): 80% (’98) 60% (’00) 25% (’06)
• Capacity expansions: 0.95 mn (2000), 5.39 (2005); 7.30 mn (2006); 9.0 mn (2008); further expansion planned, especially by China’s Big 3 for cars under their own brand names
• Emergence of domestic firms, e.g. Chery, Geely, Great Wall, Haima, Brilliance, with improving capabilities and capacity, especially in the small car segment (1.6L or less)
• Turnover among industry leaders
Changes in Passenger Vehicle Prices: 2001-2005
-40
-30
-20
-10
010
Cha
nge
in V
ehic
le P
rice
(Per
cent
)
2001 2002 2003 2004 2005
Change in Vehicle Prices, 2001-2005
Top 10 Passenger Car makers in China
050,000
100,000150,000200,000250,000300,000350,000400,000450,000500,000
Shang
hai G
MFAW VW
Chery
Guang
zhou
Hond
aSha
ngha
i VW
FAW Toyo
ta
Dongfen
g Niss
anChan
gan F
ord
Beijing
Hyu
ndai
Dongfen
g PSA
Sal
es
-40-30-20-10010203040506070
% C
hang
e
Sales, Jan-Sept, 2007
Year on Year Change
Top 10 Passenger Car makers in China, 2007
050,000
100,000150,000200,000250,000300,000350,000400,000450,000500,000
Shang
hai G
MFAW VW
Chery
Guang
zhou
Hond
a
Shang
hai V
WFAW To
yota
Dongfen
g Niss
an
Changa
n Ford
Beijing
Hyu
ndai
Dongfen
g PSA
Sale
s
-40-30-20-10010203040506070
% C
hang
e
Sales, Jan-Sept, 2007Year on Year Change
Cost pressures in the supply chain
“As margins thin and pricing competition intensifies, an efficient and developed low-cost assembly and supply base will be essential for financial success”
Head of Purchasing, major JV
Quality convergence with the West
• Quality level of 1st tier suppliers to JVs roughly comparable to that overseas; narrowing in gap for 2nd tier
• Latest VW and Toyota retooling brought the 2006 Jetta and Camry into China at the same time as in N.A; Nissan launching new global car in Shanghai
• Exports (JVs): Honda Fit & CR-V, Toyota engines, engines for CAMI plant in Ontario
Product Location
2006 2003 2006 2003 2006 2003 2006 2003PPM
% % % % % % % %
< 50 58 8 60 20 30 5 19 5650-100 22 20 30 70 10 7 48 4100-300 5 21 5 5 15 8 22 20300-500 10 22 5 5 15 25 7 4500-1000 1 14 10 14 4 41000-2500 4 9 8 18 82500-5000 6 4 8 05000+ 8 15 4
Average PPM 158.5 634.5 67.5 87.5 1070 1967.5 142.75 543
Jiangsu Jiangsu Chongqing
seats
Jiangsu
exhausts brakes brakes
Defect Rates for 2nd-tier Suppliers
Chinese Imports and Exports of Auto Parts and Components($US millions)
0
2000
4000
6000
8000
10000
12000
14000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Exports of Parts andComponentsImports of Parts andComponents
Export potential is appearing
1998 1999 2000 2001 2002 2003 2004 2005
Number of firms 2320 2349 2496 2724 2968 3605 5625 5604
Total Revenue (mn RMB) 81291.22 88518.33 108760 138783.59 185483.8 247633.1 354131.8 404419.5
Avg Revenue (mn RMB) 35.04 37.68 43.57 50.95 62.49 68.69 62.96 72.17
Export Ratio (%) 7.83 9.51 11.13 9.58 10.02 11.02 NA 14.38
Profitability 0.054 0.066 0.073 0.081 0.089 0.09 0.07 0.057
% π > 0 68.1 70.97 74.76 77.02 81.23 82.22 79.45 80.96
Profitability/>0 0.093 0.097 0.098 0.1 0.103 0.104 0.09 0.076
Summary Information for Parts and Components Firms Supplying Motor Vehicles Industry
1998 1999 2000 2001 2002 2003 2004 2005
All Firms 7.83 9.51 11.13 9.58 10.02 11.02 NA 14.38FIE 19.27 21.13 22.86 17.71 17.75 15.95 NA 19.63 of which: WOS 76.46 69.77 61.43 38.8 36.26 27.81 NA 29.54SOE 2.83 2.53 2 1.88 2.45 3.64 NA 5.4Other 4.22 5.11 5.81 6.43 6.54 8.36 NA 10.39
FIE 64.21 68.13 71.22 65.58 64.67 58.81 NA 62.16 of which: WOS 35.11 39.3 38.18 38.28 38.6 31.16 NA 40.87SOE 8.29 5.23 2.79 3.68 3.66 2.99 NA 1.66Other 27.5 26.63 25.99 30.75 31.67 38.19 NA 36.17
Export Ratios and Contribution to Total Exports: By Ownership
Export Ratios: (Exports/Sales)*100
Contribution to Total Exports (in percent)
China’s net exports of auto parts by region
Net Exports (M-X) Parts and Engines by Region
-2000
-1000
0
1000
2000
3000
4000
5000
Japa
nAsia
(othe
r)
NAFTA
Europe
Latin
Ameri
ca
Africa
Middle
East
Other
$US,
mill
ion 1995
20002005
How are firms responding to these pressures?
1. Cut prices2. Improve productivity3. Bring in better products4. Localize production and supply base5. Localize development
1. Lower costs2. Reduce time to market3. Better meet consumer demand
Localize supply chain• Can occur in a variety of ways
• Imports → Domestically sourced• In-house → Outsource• JV → 100% domestic firms
• Speed determined by OEMs• Willingness to “release” parts for localization• Ability to work with local suppliers• Size of market also important
• Often greater scope for cost reductions than by improving productivity
OEM JV/WOS Domestic Overseas(imported)
Europe 86.0 14.0 0.0
Europe 68.3 23.8 7.9
US 57.1 14.3 24.5
US 58.5 39.6 3.8
Asia (Korea or Japan) 64.4 2.2 33.3
Asia 85.5 4.8 9.7
Asia 67.9 9.4 22.6
China 41.8 58.2 0
China 36.6 63.4 0
Average (non-Chinese OEMs) 69.7 15.4 14.5
Average (Chinese OEMs) 39.2 60.8 0
Average (all) 62.9 25.5 11.3
Sourcing by OEMs in China (% of 1st tier suppliers)
Localization for Brakes1. Calipers: 2002, 20%; 2003, 83%; 2006, 93%;
2007, 95%
2. Actuation unit: 2005, 65%; 2006, 80%
3. ABS: 2005, 65%, 2007, 95%
Imported Parts and Components
0
1
2
3
4
5
6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Num
ber o
f veh
icle
s (m
illio
ns)
0
500
1000
1500
2000
2500
$US
Number of vehicles produced
Value of Imported parts and engines per vehicle
Localize design and development
• Tied to vehicle programs• More potential with domestic OEMs, but also
happening for some of the JVs • E.g. SGM• E.g. Guangzhou Honda’s new R&D Center
• Change designs for manufacturability • Long history in automotive sector
• With some localization of design, requirements of 1st
tier suppliers rising; significant investments in capabilities required to meet these demands
5-year plan of a major JVOEM in China
Reduce production costs by 40% through
Increase local sourcing for parts and components to 90-95%Increase local sourcing of tools, die and other capital equipmentInvest heavily in local R&D/product development capabilities, and require suppliers to do the same
Implications for North American Industry?
1. Three strategies have emerged for JVs in China
2. Domestic Chinese firms should not be ignored3. Exports from China are on their way4. OEMs (and now 1st tier suppliers) want global
suppliers
1. Three strategies for JVs in China
Aggressive localizationCautious localizationIntegrate in global supply chain
Each means very different things for North American suppliers
2. Domestic (Chinese) firms
Should not be ignored:Encouraged by central government; significant expansion planned, especially by the Chinese Big 3, producing under their own brandSource even more domesticallyOutsource much design work, e.g. Chery and Pinafarina
Piggy-back on supply-chain developed by JVsProvide opportunity for local capability building among 1st and 2nd tier suppliers, e.g. exhaust systems, ABS
3. Vehicle exports are on their way
Geely was present at the Detroit Motor ShowChery has partnered up with Chrysler (they were already in the process of setting up a dealer network)SAIC (partner of VW and GM in Shanghai): Set up an independent venue for exportJiangling (Landwind) and Great Wall (Hover) have tried in Europe Honda exports the Jazz from Guangzhou
4. OEMs (and some 1st tier suppliers) want suppliers with global reach
Nissan uses (only) the following criteria to put you in its ‘potential suppliers’ pool:
World class production quality at lowest costWorld class design and redesign capabilitiesWorldwide reach (production and design)
NA Firms: Chinese presence or partners critical100% Chinese parts suppliers: Looking overseas for M&A, e.g. Wanxiang and recent acquisition of Dana plants in North America
Looking forward
Continued expansion and deepening of capabilities of OEMs and suppliers, but messy
Turnover in industry leadersParts sector: Consolidation, M&A mirroring developments internationally;
Success of Chinese OEMs? Parts suppliers? Will one emerge as the next Hyundai?