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A Report on the Development2

A Report on the Development Trend of China's Auto-parts Industry (III)

By Auto Industry Institute  From:Gasgoo.comMay 09, 2008

Part III: It is getting more difficult for new comers to enter theOE market as its system has become clear and stable.

China's OE market is one of the most open markets in the world, but it is much more difficult to enter than the Japanese and Korean OE markets.

All the tier-1 suppliers of auto-parts from Europe, America, Japan and Korea have opportunities to enter the sourcing system of OEM plants in China, which is not easy in other mature markets; some American and European suppliers have enjoyed the benefits of the consumer diversity in China. And China's local suppliers have opportunities to become the OE suppliers of Japanese and Korean manufacturers.

There are some major historical reasons for the emergence of this open OE market in China:

1. The majority of China's passenger vehicle companies are joint ventures (JV). Therefore, on the one hand the Chinese side of the JV can partially weaken the dominating rights of the foreign side to the sourcing and on the other hand it is more possible for the subsidiaries or auto-parts partners of the Chinese side to enter the JV's main plant.

2. China has the requirement for local production. Historically, the foreign auto-parts supplier of a global automaker will not join the carmaker in entering its joint venture in China, and this leaves more opportunities to the Chinese side of the JV and to other foreign automakers already operating in China.

3. For lack of a complete supply system, China's local automakers need the support from foreign auto-parts suppliers in the high-tech assembly. If the costs are acceptable, foreign auto-parts manufacturers would welcome the business from China's own brand carmakers.

However, the diversity of the auto-parts supply system in China will be changed with the boosting of the previous supply system by Japanese manufacturers represented by Toyota. Since its creating of a powerful supply system, Toyota has become stronger and achieved initial success in China. The close relation between Toyota Motor and its auto-parts suppliers has been widely accepted as an effective pattern of connection of this kind. Because an increasing number of foreign auto-parts manufacturers are coming to invest in China, the local carmakers will have more opportunities to rectify or adjust the supply-and-demand system in their key strategy. The core suppliers for all carmakers will be more and more stable in the next five to ten years, although China's OE market remains to be the most open in the world. This means that it will be increasingly difficult for new comers to enter China's unconventional supply system.

This conclusion only applies to tier-1 suppliers. As the tier-1 supplier did a decade ago, suppliers in the tier-2 and tier-3 segments will have to experience a struggling period first when more and more foreign investment oriented toward these segments come into China. In the next ten years, tier-2 and tier-3 suppliers should be cautious and grasp good opportunities to gain favorable positions in the market scramble ahead.

A Report on the Development2

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