Date:10-18 15:09 Source：Industrial Innovation Think Ta Authour：Xiong Xuehui
Auto Core Parts Are Still Monopolized by Foreign-Owned Enterprises
Of the auto parts manufacturers, small and medium-sized enterprises account for up to 87% and large-scale ones only account for 9%. It is important to note that, despite the great number of domestic auto parts manufacturers, the highly profitable core parts are mostly monopolized by foreign-owned enterprises and some high-grade, high-precision and advanced parts still rely on import.
The highly profitable core parts are mostly monopolized by foreign-owned enterprises.
China is the world’s largest automobile consumer and producer, but how many vehicle and auto parts manufacturers are there in this country? How much capacity do they have and how much revenue have they received?
At the China Huadu Auto Forum held on September 24th, a research group commissioned by the Ministry of Industry and Information Technology (MIIT) revealed detailed data for the first time: now the domestic vehicle production capacity is more than 31 million vehicles per year and the capacity under construction is over 6 million per year. Currently, there are about 100,000 manufacturers (about 13,000 above designated size) in the domestic auto parts industry, with total operating revenue of RMB 3.5 trillion Yuan.
Dong Jianping, leader of the above-mentioned research group, reveals that, of the auto parts manufacturers, small and medium-sized enterprises account for up to 87% and large-scale ones only account for 9%. It is important to note that, despite the great number of domestic auto parts manufacturers, the highly profitable core parts are mostly monopolized by foreign-owned enterprises and some high-grade, high-precision and advanced parts still rely on import.
Regarding the monopoly of foreign-owned enterprises, He Guangyuan, 86 years old, former Minister of Machine-Building Industry, has some insights to share. He thinks that China attracted a lot of foreign-owned enterprises to establish joint ventures with domestic ones through the “market for technology” strategy and that we did learn certain management experience and technologies, but hardly any core technologies, unfortunately.
In the opinions of Fu Yuwu, Chairman of the Society of Automotive Engineering of China, and Xu Changming, Director of Department of Information Resource Development, State Information Center, besides improving quality and controlling costs, what domestic auto parts manufacturers should do next is carry out mergers and acquisitions overseas like Geely Motors and Chemchina and thereby grasp relevant technologies and expand new markets to increase profit margins.
Auto parts manufacturers are “small and scattered”
Few research institutes have conducted thorough surveys on and made diagnosis for the Chinese auto parts industry.
Commissioned by MIIT, a research group formed by Chinese Automotive Technology & Research Centre and China Auto Parts Industry Association has conducted research on the Chinese auto parts industry since last year and is now concluding the research. The results will be released in mid October.
The research group collected data from more than 50,000 enterprises, covering 98% of the industry. According to Dong Jianping, leader of the research group, the industrial output value of Chinese auto parts manufacturers is about RMB 3.8 trillion Yuan, with operating revenue of RMB 3.5 trillion Yuan. The industry average profit margin is 6-8%, only about 50% of that achieved by foreign-owned enterprises.
Research data show that the current domestic vehicle production scale has reached 25 million vehicles per year, and that the total industrial output value is RMB 7.5 trillion Yuan. It is expected that the peak production scale will be 35 million vehicles per year, with an annual increase of about 4%.
Domestic car makers have built up a vehicle production capacity of more than 31 million vehicles per year and the capacity under construction has been over 6 million per year. For passenger cars, the production capacity is over 25 million vehicles, 81% of which is used; and for commercial cars, the production capacity is over 5 million, only 52% of which is used, indicating that it is underutilized.
It should be noted that the industry average profit margin for domestic auto parts enterprises is 6-8%, while foreign-owned enterprises and joint ventures have a profit margin of more than 15%. This means that with the same costs, a foreign-owned enterprise will make a profit more than twice that made by a domestic enterprise.
The reason behind it is that domestic auto parts enterprises are “small and scattered”. Data show that there are currently about 100,000 manufacturers in the domestic auto parts industry, but only 13,000 have reached an annual output value of RMB 20 million Yuan. In terms of enterprise scale, small enterprises account for 62%, medium-sized ones 25% and large ones 9%. You can see that “there are very few large auto parts enterprises”.
Dong Jianping believes that the domestic automobile industry chain still has a lot to improve in terms of integrity, independence, completeness and controllability. Currently, enterprises lack core technologies and are poor in comprehensive strength, and the industrial chain has its deficiencies; what is more, there is no adequate upstream and downstream support and the brand premium is low.
Core parts are monopolized by foreign giants
Some industry expert indicates that though the industry scale is continuously expanding, local auto parts manufacturers are still no match for foreign-owned ones. Most of them are caught in the vicious competition of homogenized products and prices, mainly because they fail to invest enough in innovation and lack product core competitiveness.
Statistics show that in 2015, the R&D investment only accounted for 2% of the total investment in the Chinese auto parts industry. Besides the low investment in R&D, due to technological barriers, domestic vehicle and auto parts manufacturers find it difficult to achieve breakthroughs in highly technically demanding products and core parts, especially in electronic and electric controls. Therefore, these products are still supplied mainly by foreign-owned enterprises.
It is said that currently there are about over 1,500 kinds of domestic auto parts, which can be classified into three tiers, including 6 systems, 41 sub-systems and a total of over 1,000 parts. Among them, some critical, high-grade, high-precision and advanced and highly profitable products like motor power assemblies, general products of electronic/electric systems and energy components are mainly imported from overseas.
In the interview, He Guangyuan also points out that the domestic auto parts industry has long been “in a messy situation” – for example, key technologies like automatic transmissions and engines are monopolized by foreign-owned enterprises. “In the past, we called for the “market for technology” strategy and as a result, almost all world-renowned car makers came to China and established joint ventures with us. We did learn certain management experience and technologies, but hardly any core technology, unfortunately.”
Consequently, domestic auto parts manufacturers still have a lot to improve in the high precision, quality conformity and stability of products. Take engines for example. Traditional finish machined and cast parts can be supplied by domestic manufacturers, but high value-added products like electric systems, fuel supply systems and ignition systems are completely supplied by foreign vendors as there is hardly any domestic vendor in these areas.
Dong Jianping indicates that currently domestic auto parts manufacturers are basically at the low end of the “V-shaped” industrial chain while the highly profitable core parts are basically monopolized by foreign-owned enterprises, which “has become a serious problem for our industrial chain”. For instance, almost all engine control systems, automatic transmissions, active safety components and electronic control components used by domestic vehicle manufacturers are imported from overseas.
Are overseas merger and acquisition feasible?
Some expert points out that this reliance on imported core parts reduces the profit margins of both domestic vehicle and auto parts manufacturers.
For example, gasoline and diesel engines are monopolized by Mitsubishi and Isuzu - most local auto makers are using engines manufactured by these two companies; heavy-duty diesel engines are supplied by Cummins Engine Inc. - Yutong, King Long, Youngman and Zhongtong Buses and engineering machinery enterprises like SANY Heavy Industry and Zoomlion are all using Cummins products.
Bosch, Delphi (formerly an auto parts division of GM) and Denso (an affiliated company under Toyota) dominate the Chinese electronic injection market. Bosch only has taken up over 60% of the market shares. “Every time Chinese consumers buy a vehicle, they will contribute thousands of Yuan to the profits of these three foreign manufacturers, whether it is a car or a truck, local-brand or foreign-brand, gasoline fueled or diesel powered.”
Multinational auto parts giants like Delphi, Visteon (formerly an auto parts division of GM) and Faurecia design and manufacture the interiors and exteriors for most of the local passenger car makers.
“China should have its own Bosch and Delphi,” said Wang Dazong, Chairman of VI Capital, who once worked in GM and Delphi for many years. He believes that if local auto parts manufacturers want to break technological barriers and make higher profits, an effective way is to go abroad and carry out mergers and acquisitions involving some foreign auto parts enterprises.
It is reported that after paying over RMB 50 billion Yuan to acquire Pirelli, ChemChina became a major shareholder of this high-end tire giant. Now, ChemChina is able to introduce Pirelli’s technologies to China. There are more and more cases like this. For example, Northeast Industries Group acquired the “Fuba” reception system (the world’s leading vehicle reception system) business from Delphi and in this way accelerated its structural adjustment and upgrade.
Regarding whether it is feasible for domestic enterprises to acquire technical support through overseas M&A, Yang Xueliang, PR Director of Geely Holding Group, says that during the five years after the acquisition of Volvo, Geely Holding Group invested a total of USD 11 billion in the R&D of Volvo Car, which directly promoted the progress in the design, R&D and marketing of Volvo Car.
One of the accomplishments made jointly by Volvo Car and Geely Automobile is the Compact Modular Architecture (CMA) for mid-sized and compact models. CMA was developed by Geely’s China Euro Vehicle Technology located in Gothenburg, Sweden. It work scope covers all aspects of car R&D, ranging from overall architecture, power train and transmission system to upper structure engineering and exterior design.
Chen Guocai, Deputy Head of Manufacturing Department of Dongfeng-Nissan, indicates that Dongfeng-Nissan will work on “quality synchronization ”, “cost synchronization” and “time synchronization” to achieve the synchronization of quality of the whole value chain suppliers covering auto parts, sales and after-sales and the vehicle manufacturer.
Fu Yuwu, Chairman of the Society of Automotive Engineering of China, believes that the Chinese auto industry has become an important part of the global auto industry. By 2015, China had already taken up 27% of the global shares, meaning that one out of every four cars had been produced by China. “I see our Chinese auto companies really have strong desires to go out and they do possess some favorable conditions, but currently the Chinese auto industry is still at the beginning of its international development and has a long, long way to go to reach the level in the developed countries. This is not what a so-called automobile superpower should look like.” Fu Yuwu says that under the industrial capital and financial support, Chinese auto companies need to be confident enough to go out and carry out overseas mergers and acquisitions and at the same time be well prepared to cut into the high-end European and American markets and make great efforts to carry out targeted product development. Meanwhile, relevant state departments should also provide adequate support in order for these auto parts enterprises to “go out”. “If the Chinese auto industry wants to achieve international development, it has to attach equal importance to the development of both domestic auto parts and vehicles”.