Driving into China
For global auto parts suppliers still recovering from the Great Recession, China offers near-certain prospects for robust growth. It's no surprise, then, that some Canadian companies are putting the pedal down by investing heavily in the world's largest auto market. But how smooth is the ride?
September 1, 2012 by Mark Stephen, editor
In a famous scene from the classic western Butch Cassidy and the Sundance Kid, Paul Newman convinces Robert Redford to pull up stakes for Bolivia by telling him, “If we were in business during the California gold rush, we’d have gone to California, right? So when I say ‘Bolivia’, you just think ‘California’.”
In that same spirit, a lot of global automotive parts suppliers are looking at China and picturing a California gold rush of their own. Attracted by stunning growth prospects, they’re investing heavily and ignoring a recent slowdown in auto sales in China — in the first four months of this year, sales of passenger vehicles rose just two per cent, according to the China Association of Automobile Manufacturers. “Notwithstanding the slowdown, China is now officially the world’s largest automotive market, with sales in the range of 19 million vehicles, which is one-quarter of the global production,” said Steve Rodgers, president of the Toronto-based Automotive Parts Manufacturers Association (APMA). “It’s obviously very significant.” Indeed, analysts and industry executives expect light-vehicle sales to reach 30 million by 2020, more than double the 14.5 million sold in 2011 — in other words, in eight years China’s auto market is tracking to match the size of today’s European and U.S. markets combined. Chinese consumers are increasingly aware of — and want — the advanced technology that automakers are lavishing on vehicles sold in North America and Europe.
Even better, because a growing number of autos are built on global platforms, suppliers can gear up swiftly in China by producing the same parts that they make elsewhere.
In a nutshell, it’s a great opportunity for Canadian auto parts suppliers. Canada is one of the largest automotive producers in the world, with shipments of cars and trucks reaching $77 billion in 2011. The auto parts and component manufacturing sector alone employs over 97,000 people, with over 900 businesses producing original equipment and aftermarket auto parts, components, and systems. Approximately 60 per cent of their production value was exported, a significant percentage of that to China.
It’s not exactly news, of course, that a good number of Canadian auto parts makers are already in China, some by having simply followed North American auto makers because of existing relationships. Take Tier I supplier Magna International Inc. The Aurora, Ont.-based company had just one Chinese plant in 2001, has approximately 20 plants throughout China today, and plans to open eight more by 2014. “China is an important market from a top-line and bottom-line perspective, for Magna as well as other parts suppliers,” said Jim Tobin, chief marketing officer and president, Magna Asia. “We had approximately $700 million in sales in China in 2011, and we expect more than $1.5 billion in sales by 2014.”
One Southern Ontario-based Tier II supplier, which asked not to be identified by company name, has been in China for almost 10 years. “We have six manufacturing facilities in China at this point, supplying mostly interior parts, with some exterior and VH-type applications, for both foreign and domestic automakers,” a company representative said. “It’s a very large market for us, and we see it as being larger in the future.”
Okay, so the trail to China has been pretty well blazed by this point — but that doesn’t mean there aren’t some bumps still left in the road, either for well-established companies like Magna and the Tier II supplier, or for parts makers just taking their first steps today. To begin, it helps to understand the structure of the market. “As far as what Canadian auto parts suppliers are looking for, there are two distinct Chinese markets,” said Steve Rodgers. “The first involves a joint venture with a foreign automaker, for example the Volkswagen tie-up with the SAIC Motor Corporation — these are global platforms. The second involves the individual vehicle manufacturers in China; there are about 85 of them, they’re not as far along on the quality chain, they have a tendency to have a local or regional following, and they’re more price-sensitive.”
GLOBAL PLATFORM = GAME CHANGER
You might not know it, but there’s a tectonic shift currently underway in the Chinese market, caused by the aforementioned growing number of autos built on global platforms. One positive result is the simplification of the purchasing process. “For a long time, it was necessary for a supplier to have relationships, for example, with the General Motors purchasing staff and with the SAIC Motor Corporation purchasing staff, because either or both could have an impact on final sourcing decisions,” said Steve Rodgers. “Now, all of the global OEMs are gaining more control over their purchasing operations and over the need to make consistent corporate global purchasing decisions.”
The potential benefit for foreign parts suppliers is hard to exaggerate. “From our perspective, getting involved with a global platform removes a lot of the risk and anxiety that are associated with going into markets that we’re not as familiar with,” said the rep from the Tier II supplier. “Our first investment in China was seeded by a global program in fact, and we went on to build infrastructure from there — it allowed us to look at development opportunities with both foreign and domestic Chinese automakers.”
The opportunities aren’t just theoretical. Daimler AG, the world’s second largest maker of luxury cars, recently announced plans to shift production of its best-selling Mercedes-Benz C-Class from Germany to Alabama in the U.S., and Beijing, China by 2014. “Canadian suppliers that typically had C-Class business in Germany will now have the opportunity to supply to China, as well as to the U.S.,” Steve Rodgers said.
Not that making parts to satisfy a global platform is a license to print money; sometimes it’s the trigger for even more investment spending. Chinese shoppers still have preferences, which is where operating a technical centre to modify global autos for local tastes — as the Southern Ontario Tier II supplier and others are doing — can pay off.
For others, though, the cost of a substantial investment might be seen to outweigh the benefits. “China is unlikely to become Magna’s largest market by sales because most of our products require a heavy capital investment, so to duplicate what we have in North America — which is our current largest market by sales — would be an enormous challenge,” said Jim Tobin. “Also, and notwithstanding global platforms, automakers in China tend to do more in-house component manufacturing than they do in North America.”
HANDLING THE CURVES
For many manufacturers, the thought of undertaking serious business in China raises one spectre in particular: the well-known threat of intellectual property (IP) theft. It’s safe to say that none of the Canadian parts suppliers working with the Chinese are oblivious to this, although most, if not all, have found ways to protect themselves. “We have some concerns about IP protection, but they’re not major,” said Jim Tobin. “There are many other barriers to entry in the automotive business besides IP, such as specifications, testing, warranty, manufacturing know-how, process expertise, and capital. With all of these needs in addition to IP, copying products and supplying them to the OEMs to meet their standards is more of a ‘full service’ challenge.”
For some, constant innovation is the best defense. “IP theft exists anywhere in any market, and it’s a real problem if, from the technical perspective, you’re just standing still,” said the rep from the Tier II supplier. “For us, the key has been to keep innovating, so that by the time someone tries to reverse engineer one of our products we’ve already moved on to the next generation.”
A second possible hurdle is the government. China practices a form of state capitalism, with corporations that are only partly free and government often the owner rather than simply the regulator. Simply put, the Party can be dictatorial, with results that don’t always favor foreign businesses. Case in point: China’s central government decreed early in 2012 that government officials must buy vehicles from domestic automakers. That’s bad news for Audi — their brand of choice — but possibly good news for other suppliers that can provide elaborate rear seating areas preferred by chauffeur-driven officials. In the end, the impact of government interference might be a wash. “We haven’t had any problems with the current government,” said Jim Tobin. “That said, 2012 is an election year in China and a new administration will come in and develop its own policies, and we’re waiting to see what some of these changes could mean for Magna.”
A related concern involves some of the things the Chinese government, as a government, is charged with doing: overseeing employment, maintaining roads and railways, et cetera. China is still a communist country, and that fact has ramifications that will touch on all of these issues, and more. “The cost of labor in China is cheap, but it’s rising, and Canadian suppliers with operations there need to learn how to control the cost structure,” said Steve Rodgers. Mastering the infrastructure can be tricky, too. “The infrastructure for moving goods around in China is limited,” Rodgers continued. “There are really only four big automotive centres — Beijing, Shanghai, Wuhan, and Guanhzhou — and just because you’re in one of those four areas doesn’t mean that you can ship to the other three locations competitively; this can definitely be a factor in determining where you’re located.”
What about broader cultural clashes between Canadian businesses and the Chinese people at large? “As a global company, we are accustomed to working with a variety of cultures on a daily basis, so we don’t view it as a cause of friction,” said Jim Tobin. “That said, we typically have either North American or European staff oversee the development of a new facility in China, depending on the home site of the particular product and whether or not the product is new to the market. In cases where the product isn’t new to market, Chinese staff is fully competent to start a new plant on their own.”
This may be an area where Canadians are at a particular advantage. “While the Chinese are very open and willing to build global business relationships with anyone from almost anywhere, they tend to see Canadians as particularly easy to deal with, probably because we have such large Chinese populations in major cities like Toronto and Vancouver,” said Steve Rodgers. “For the suppliers, this can make it easier to find people who are willing to go back to China and assist in startup operations.”
Organizations like APMA work hard to make it easier still. “APMA has participated in several of the most recent China International Auto Parts Expos in Beijing, taking a number of Canadian suppliers over with us and introducing them to potential partners,” Rodgers continued. “And we continue to work with Chinese companies that are coming to North America in search of partnerships, and interact regularly with all of the Canadian consulate and embassy staff in Beijing and other locations throughout China to help companies get established there and grow their businesses.”
To return to where we came in, things didn’t work out too well for Butch and Sundance down in Bolivia but the road to China is considerably less risky for Canadian auto parts suppliers, provided they take a few elementary precautions. “We studied the Chinese market for several years before going in, and went in with a partner rather than as a wholly-owned business when we finally did,” said the rep from the Tier II supplier. “China is a long way from home and, whether you’re doing Tier I or Tier II business, being successful requires a good, solid plan.”