DETROIT – A new study by PRTM Management Consultants finds the majority of North American automotive suppliers sourcing from China are not realizing great savings.

“Over half the participants in our study achieved less than 40% of their savings goals” at their Chinese operations, Stephen Pillsbury, principal-PRTM, says here at an Original Equipment Suppliers Assn. conference at the 2006 Society of Automotive Engineers World Congress.

While company practices, not components, were the key savings driver with suppliers doing business in China, PRTM did find suppliers in the fields of tooling, chassis/powertrain, electronics and body/interior yielded the greatest savings, while those producing plated materials, brass products, coil springs and parts requiring complex machining, saw the least savings.

For the study, dubbed “Enter the Dragon? – Lessons Learned in China Sourcing,” PRTM surveyed more than 50 people from Tier 1, 2 and 3 North American suppliers with revenues in excess of $200 billion, including supply chain directors, vice presidents and purchasing directors.

PRTM found that while 42% of suppliers surveyed were “challenged,” mainly because they were trying to source parts remotely and had no local Chinese presence, the “leading” 22% of North American suppliers in China achieved twice their intended savings at a rate 30% faster than expected.

“They have experience on their side,” Pillsbury says of the leading suppliers, adding most took six to 10 years to achieve their savings and spent $10 million-$25 million to establish what PRTM calls “critical mass,” or local operations, in China.

“This six to 10 years really came after a strong CEO mandate,” he says of how involved the leading North American suppliers are in China, saying the study dispelled the notion North American suppliers can “test the waters” by remotely doing business in the country.

The primary reasons many suppliers missed their China savings targets were product design and specification issues (25% of respondents) and quality-related costs (20%), the study found.

Andreas Mai, principal-PRTM, says North American suppliers must be certain their Chinese partners understand their drawings and technical details to curtail product design and specification issues, and that certain suppliers must train their Chinese partners to understand the concept of continuous improvement.

PRTM concluded that China sourcing requires a minimum savings of 20% to outweigh such negatives as costs associated with logistics, quality and intellectual property (IP) risks.

Mai cautions suppliers not to get too excited about the low price of a Chinese-made component.

“Premium freight is the most basic risk,” Mai says of one of the hidden costs of doing business in China.

He says suppliers wishing to save money by producing in China need to factor in the cost of insurance, saying about 10,000 containers are lost annually during shipment from China to the U.S. They also should budget in the cost of lawyers and investigative teams to enforce IP rights and allocate funds to cover quality-related risks associated with doing business with one of the country’s relatively new suppliers, Mai says.

“Lead time can be fixed with inventory but there is no quality fix,” he says of one survey respondent’s input.

Suppliers should carefully select their business partner in China by doing local research and networking, not flipping open the Yellow Pages, Mai says.

The best-in-class companies manage risk better by budgeting three times as much for late shipments and five times as much for airfreight as they do with their North American operations, he says.

As far as suppliers wanting to establish a China strategy, PRTM finds joint ventures are becoming a thing of the past, with 21% of respondents in a JV with a Chinese company in 2005 but just 14% expected to be in one by 2010.

The growth in China sourcing will come in the form of greenfield plants, says PRTM, with 28% of respondents taking this approach last year and 44% expected to in 2010.

“Joint ventures are out,” Mai says, adding land in China still is relatively cheap, making a greenfield facility worthwhile.

Mai says oftentimes one of the biggest obstacles for North American suppliers wanting to establish operations in China can be a “high bias factor,” things such as not having local market knowledge, communication barriers and different business customs.

Engineers also can create an impasse, Mai says, because some believe the raw materials needed to produce a particular component in China are unavailable.

“Your engineers have to be aware of what materials are available in China,” Mai advises the leadership of North American suppliers, adding the material in question may be at hand or there may be another material that would make a good substitute.

cschweinsberg@wardsauto.com