'Euphoria and uncertainty': Looking at sourcing in China's automotive industry

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From a China Daily report on Thursday, China's auto production and sales are both likely to hit a record 10 million units in 2008. In 2006 China surpassed Japan to become the world's second largest car market, trailing only the U.S., and is currently the world's third largest vehicle producer after Japan and the United States. Set to play an integral role in China's burgeoning consumer spending, vehicle sales jumped to 7.95 million units in the first 11 months of 2007, a 23.3% year-on-year increase. (Even in the Tibet Autonomous region, where according to a Xinhua report 1 in 20 people now own an automobile, due to soaring car ownership vehicle tax has been introduced for the first time.) Reflecting China's expanding industrial prowess in the automotive sector, these developments are part of China's high-tech industry growth which, according to Wu Zhongze, vice-minister of science and technology, has averaged 27% each year for the last five years. While allowing domestic products to substitute imports, innovative homegrown technologies have given domestic car makers a 17% share of China's total auto sales in 2007.

According to a Deloitte Special Report entitled Future Drivers of the China automotive industry, in 2005 the total value of automotive products and export volume of vehicles from China for the first time surpassed the corresponding imports into China. International demand for Chinese vehicles have been steadily increasing, especially for light weight trucks, and a few ambitious Chinese automotive companies are planning to export to mainstream markets in Europe and North America. Yet despite a savings potential of 10-40% or more on landed cost for simple components with high labour content, sourcing from low cost automotive suppliers in China is a risky undertaking complicated by immature suppliers lacking reliable information and compliance controls and who are often unable to meet the demands of international procurement.    

An IBM Business Consulting Services report on 'how the Chinese view their automotive future' found evidence of 'euphoria' about the development of China's automotive industry, yet also 'uncertainty' about the 'significant gaps and challenges for both domestic and foreign companies relating to a host of issues including poor quality, unknown/uncertain supply, lack of a clear export strategy and intellectual property concerns limiting the introduction of new technology.

Our study results pinpoint a number of serious challenges...including defaults on auto loans, uncertain relationships with joint venture partners, higher demand for oil, higher pollution levels, and severe traffic problems in the cities. (Yet) Chinese manufacturers and suppliers realize the need for research and development capability and are taking steps to close the gap between themselves and their world-class competitors.

Ultimately, as the Deloitte report concluded, automotive sourcing from China 

is a strategy, not a tactic. Give it the commitment and attention it deserves and you will gain both short-term wins and long-term sustainable improvements.

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Brian said:

There are too many small China car manufacturers. China has a long way to go to catch up with Korea auto industry.

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