International FocusAutomotive molders: Take advantage of China

Whether you form a joint venture or opt to export to the ROC’s growing middle class, the time to make automotive hay in China is at hand.

Molding of automotive parts in North America has reached a plateau. Little substantial growth in Mexico, Canada, and the United States is likely for the next few years with production levels hovering at no more than 16 million units. Sure, new applications may expand opportunities. But this is not enough to restore growth to above 2%, let alone 3%.

Yet North America’s automotive molders are a powerhouse of technology and know-how. This is something they can and should exploit by exporting molded parts, exporting know-how and services, and by setting up joint ventures in China and, soon, India.

Yes, the China market is rough. Copyright infringement is rampant and corruption is systemic. Still, this is the single best opportunity today for North America’s automotive parts makers to boost income. This applies as well to small molders as it does to large integrated suppliers of subassemblies. So what is the opportunity?

Enormous growth

Chinese data are frequently unreliable. We have used forecasts supplied by the Chinese government, the U.S. Dept. of Commerce, and several major U.S.-based automotive parts suppliers to prepare the following -projections.

By the end of 2007, China had become the second-largest new automobile market in the world and had boosted its demand for U.S. automotive parts. About 7.5 million cars were built in China last year. According to current projections, by 2015 China will produce about 15 million vehicles per year. Current production volume will double.

While most of these are low-cost cars compared to U.S. vehicles, the expanding middle class and growing spending power will create demand for more enhanced cars, and thus cars with a greater use of molded parts.

China’s automotive industry is growing fast. By November 2006, China had a total of 6322 automotive enterprises. The total output value of the automotive sector for 2007 was more than $223 billion.

Major Chinese carmakers include First Automobile Works Group (FAW), Dongfeng Motor Corp. (DMC), and Shanghai Automotive Industry Corp. (Group) (SAIC). In addition, companies such as GM, Ford, and many European firms have major operations in China.

Currently, auto parts and accessories entering China enjoy lower tariff levels than cars (the average tariff is 10-13% for parts/accessories and 25% for cars). China has agreed to lower tariffs on imported auto parts and accessories to 10%. Although this difference in duty rate was initially responsible for an increase in car kit imports, the loophole has been tightened.

According to the U.S. Commerce Dept., the automotive parts sector in China is highly fragmented, with 4447 automotive parts producers combining for $43.66 billion in revenue in 2005, a 4.5% rise over 2004. Growth of the Chinese automobile industry has led to an increased demand for U.S. imported vehicle body parts and accessories (HS Code 870829). U.S. annual sales in this market have risen more than 72% in each of the last two years after stagnant growth from 2001-2003.

U.S. position in the market

According to a report by the U.S. Commerce Dept., U.S. firms’ advanced technology and experience make them very competitive for projects using a transparent bidding system, such as those funded by the World Bank, Asian Development Bank, or other multilateral funding sources.

U.S. automotive parts exports to China have been rising steadily and are projected by the Commerce Dept. to double in the next three years alone to about $300 million.

U.S. exports to China are rising sharply. Overall in 2007, U.S. exports to China exceeded $65.2 billion, a four-fold increase since 2000. For instance, according to the U.S. Commerce Dept., exports to China from Michigan rose 521% between 2000 and 2007. In the same time period, exports from Ohio rose 370% while exports from Pennsylvania rose 369%. A good portion of these exports is automotive parts.

Where molders benefit

North America’s automotive molders have multiple options to exploit the fast-growing Chinese auto market. One option is to set up factories inside China. This remains a difficult step because of the risk of intellectual property theft as well as stringent Chinese regulations on foreign ownership of industrial enterprises: Molders are essentially forced to go into a joint venture with a Chinese firm, with such firms often owning more than 50% of the total.

Another option is straight exports, and that has helped numerous automotive parts firms. Even though China has raised tariffs on imported automotive parts, the market remains attractive and continues to grow. A third option is to export know-how and technology.

Based on the best available figures, more than 189 U.S. molders have set up shop inside China in the past five years. Data for 2007 show their sales inside China now exceed $3.8 billion in automotive parts.

But U.S. companies are not the only ones aggressively expanding into the Chinese automotive parts market. Another major factor is India—by itself a major future market for U.S. car parts.

This year alone we have word that more than 20 Indian auto component makers, including major suppliers such as Talbros, Ashahi Glass, ZF Steering Gear (India) Ltd., GNA Axles Ltd., Luxite Industries Ltd., and Sundaram Brake Linings Ltd., are planning to manufacture parts inside China. While some of the output will be aimed at China’s auto industry, others will be aimed at exports from China.

“The main reason for foreign companies to set up plants in China is to take advantage of the large Chinese market,” says Suresh Krishna of Sundram Fasteners Ltd., the first Indian auto parts company to move into China four years ago. “In fact, we started the plant for exports from China in the first phase. In the second phase, we have now started supplying to foreign car firms in China. In the third phase, we will be covering the Chinese auto companies.”

U.S., Indian, Canadian, and Mexican car parts makers operating in China not only supply that country’s domestic industry but also see major export opportunities. This was confirmed recently. In March, BMW reported that it plans to buy 4.4 billion yuan ($627 million) worth of car parts from Chinese suppliers this year, 22% more than in 2007, the Shanghai Daily reported.

U.S. molders can also benefit from the general perception of Chinese cars’ low quality. This will matter more and more as China tries to become an exporter of cars, and the ability to point to the use of proven foreign technology will help make it easier, many believe, to attract clients for cars in North America and -Europe.

In March, Brilliance China Automotive Holdings Ltd., BMW’s partner in the country, signed a preliminary agreement aimed at beginning exports of low-cost sedans to the United States in 2009. Brilliance, becoming the latest Chinese firm to unveil plans to enter the U.S. market, has signed a distribution agreement with Rocket Capital Management LLC (a vehicle of Houston Rockets owner Les Alexander) and Red McCombs Automotive, executives said.