A Report on the Development Trend of China's Auto-parts Industry (II)
By Gasgoo.com Auto Industry Institute From:Gasgoo.comMay07, 2008
Part II: The mergers and acquisitions (M&A) wave will not comesoon, and the number of suppliers is likely to increase.
Ten years ago, some international famous companies predicted that auto-parts suppliers in China would have a big reshuffle before 2010 and nearly 70% of the auto-parts suppliers would be merged or acquired. However, the large M&A wave has not come yet, though there have been some mergers and acquisitions occasionally. As a matter of fact, the numbers of auto-parts suppliers have been increasing in the past five years.
It is an inexorable trend for a diffuse supply market to become more concentrated, but it is very difficult to judge when the restructuring of China's auto-parts market will take place on a large scale. We will analyze the external factors for mergers and acquisitions from five perspectives to judge how big the possibility of a large M&A wave in the next few years could be.
1. Market growth. As mentioned in Part I of this report, both the OE market and aftermarket in China have shown signs of sustained growth in the long term. In the incremental market, the existing auto-parts manufacturers will mostly choose to grasp a larger share of the new cakes by boosting their capacities or building new facilities. Only in a mature and stable market, will the zero-sum games of my expansion and your contraction happen. There may be more new-comers to the future incremental market. However, short and local adjustment will be possible after new capacities are excessively added, but as a whole the number of auto-parts manufacturers will not decrease sharply. Besides, a precondition for corporate mergers and acquisitions is the underperformance and even loss-making of the acquired company. But heavy losses are rare in an incremental market, though the profit rate will probably decline. This will give little opportunity to those who hope to enter the market through mergers and acquisitions.
2. The concentration of complete vehicles. Industry experts were once invited by Gasgoo.com to analyze the maturity of today'sChinese complete vehicles, and their basic judgment is thatChina's auto market has just entered into the early stage of a mature market, and it will take at least five years to have large-scale M&A between auto manufacturers. Therefore, it is impossible currently for the number of suppliers to decrease greatly amidst the supply-and-demand system adjustment as a result of large-scale M&A.
3. The competitive features of the current market. The OE market of passenger vehicles is believed to have the greatest potential for growth, and most auto assembly plants use foreign brands, so all kinds of auto-parts companies have emerged to make the competition in this market the fiercest. In this market, the tier-I suppliers of auto parts for the Chinese-holding-majority-stake joint ventures will not be acquired and will instead continue to grow fast. In the OE market of the commercial vehicles, there is less foreign investment and most manufacturers produce China's own-brand cars, so the auto-parts suppliers focusing on this market are unlikely to be acquired in the near future. The aftermarket has little foreign investment and is still an expanding segment for auto-parts suppliers. Some of these suppliers can also shift their business to the export market, so all the supplier in the aftermarket is more unlikely to be acquired. But the suppliers for the export aftermarket will experience more or less pressure in the next two years and those who cannot adjust their market strategies will be possibly edged out of the market.
4. The entry strategy of new comers. The survey by Gasgoo.com and the recent trends show thatpowerful foreign investors would mostly enter the Chinese market byestablishing new companies, rather than by acquiring localcompanies.
5. The nature of China's auto-parts supply market as a manufacturing base. Aside from the sheer magnitude of China's auto-parts market, the auto-parts supply market of China is expected to become the world's auto-parts manufacturing base because of its low labor costs, among many other factors, and Chinese and foreign companies alike will benefit from this nature. As multinationals pay more attention to further sourcing in China and foreign auto-parts companies begin to value the export the market, the quantity of China-made auto parts will depend on the local market situation and will also be influenced by the progress of the global manufacturing bases.
Based on the analysis from the five perspectives above, we conclude that although the auto-parts suppliers who focus on some specific markets will risk mergers and acquisitions or will be forced out of the markets in the coming few years, the prospects of auto-parts suppliers as a whole are very optimistic and the number of auto-parts suppliers or manufacturers will increase rather than decrease in the next three to five years in China.
A Report on the Development