China's busting out all over

Adam is about to bust loose in China.

With its 1.2 billion people, growing economic power and determined strides toward a market economy, China promises to be the key emerging territory for the auto industry in the next 10 years. China also has the potential to become an important export base -- a gateway to Asia -- for Western carmakers and suppliers looking to step up the battle against the Japanese in the region.

The economies of both China and Southeast Asia have been growing at a phenomenal pace -- some 10% per year since 1988. And vehicle sales have swelled 30% annually. "By the year 2000, the seven Asian Tigers (China, Indonesia, South Korea, Malaysia, Taiwan, Thailand and Vietnam) will form the world's fourth largest automotive market -- and then start to take off toward North American market levels," writes Michael J. Dunne, president of Bangkok-based Automotive Resources Asia Ltd., in an essay in The JAMA Forum, the official publication of the Japanese Automobile Manufacturers Association "Automakers who want to be truly global cannot neglect Asia's rising giants."

But for automotive suppliers -- particularly North American-based companies -- China has presented a Catch 22. While many believe it's critical to be in on the ground floor of an emerging auto industry, some suppliers may find it too risky to make major investments in a country where most of the customer base has yet to arrive.

Still, that hasn't stopped offshore automakers from taking the plunge since China unleashed its latest automotive policy last July. And activity should heat up during the next 18 months, when the government is expected to sign off on several new vehicle-building projects involving Western carmakers.

Included are a minivan/car assembly deal in Shanghai fought over by General Motors Corp. and Ford Motor Co., and a national minivan project up for grabs between Chrysler Corp. and Mercedes-Benz AG. In addition, GM and Ford also are proposing joint ventures with the Chinese for output of European B-class cars (Opel Corsa, Ford Fiesta), and Chrysler is kicking around a plan to add assembly of now-defunct Spirit/Acclaim A-body cars at its Jeep-building joint venture in Beijing.

If any of the projects come to fruition, it will be a boon for partsmakers interested in heading East. It's no secret that Ford, GM and others already are recruiting key suppliers to join them in China. Carmakers with programs there want to get local content to 80% or more as quickly as possible, in part because China's auto policy requires 40% local content the first year, 60% the second and 80% the third.

Even more importantly, the more quick-ly manufacturers can localize content and take advantage of lower labor rates and reduced tariffs, the less costly vehicles will be to build. That, in turn, will make them more accessible to Chinese consumers and more viable in export markets throughout the Asia/Pacific region.

The partsmaking arms of GM and Ford already are highly active in China, laying a support base for any car-building ventures to follow. GM's Delphi Automotive Systems has joint ventures for wiring harnesses, driveshafts, electrical components and engine-management systems. It also has licensing deals for compressors, electrical systems and other components. Ford's parts operations have launched three separate joint ventures with the Chinese for production of glass, plastic parts and electrical components. Both automakers say more tieups are imminent.

Activity from other major suppliers also has been heating up in recent months (see chart at right). Many are going into China through joint ventures or less capital-intensive licensing deals with one or more of the 4,000-plus existing Chinese partsmakers, but some are establishing wholly owned operations -- an option open to partsmakers, not vehicle builders.

GM's Delphi has gone the joint-venture route in China. Chinese partners "understand the politics, and they understand the operating environments, and they understand how to get things done when there are no Cliff Notes (summaries) readily available," says Rudi von Meister, Delphi's director of China operations. "They also have very good ties with people who will help the venture win business, whether with leaders at key customers or government policy makers."

But going it alone also can have its benefits. Wholly-owned operations don't have to satisfy two parties with different goals and expectations. Starting from scratch also means there's no chance of inheriting a bloated, unproductive workforce. "If there is a need for autonomy in decision making, the best way to ensure that is not to have any partners telling you what you should be doing," points out Mr. von Meister.

Executives with AlliedSignal (Automotive) Turbocharging Systems operations took a look at more than a dozen existing Chinese manufacturers before deciding to set up a $27-million wholly owned plant to make Garrett turbos for truck diesels.

Lack of a local partner hasn't proved to be a negative, says Jim Arnold, general manager-Asia for Alliedsignal. "We've been received very favorably. Many Chinese customers perceive us to be a Western company bringing technology and Western management techniques," he says. "We're using as many local people as possible -- we think that's the proper combination, local people with the backing of Western technology."

Construction of the 86,112-sq.-ft. (8,000-sq.-m.) Allied plant in an industrial park in Shanghai, expected to be completed in September, has gone smoothly, Mr. Arnold says. "all things considered, it's not been that different from other countries. Building a factory is never easy, but we're approximately on schedule."

Experts advise companies entering China to make sure they understand up front how they're going to repatriate profits. They also recommend that companies have official approvals for their projects from all government agencies involved and to make sure loans are backed by major Chinese banks. Don't expect any short-term payoffs, they warn. Above all, be prepared for the risks.

"Some day China may decide to eliminate foreign ownership or control of its auto and auto parts industry. These problems and threats are real, and each company must weigh them against the potential benefits and its ability to absorb unforeseen costs," warns Michigan-based ELM International Inc. in its just-released directory of auto parts suppliers in China, The ELM Guide to the Chinese Auto and Auto Parts Industry.

Western companies also should be aware of the high price of doing business in china. It costs about $250,000 annually per expatriate stationed in China, based on some industry estimates.

The parts sector is considered by many to be the weak link in China's plan to double automotive output by 2000 and turn the industry into a national and global force by 2010. The country has spent considerable money and energy in developing the vehicle-building industry, but far less on parts. Of the 12 billion renminbi (US$1.4 billion) invested in the auto industry during 1985-1989, only 17% was directed toward the parts sector. Only about 3% of spending in 1990-'94 went toward parts, according to a Japanese study of China's auto industry.

Among those chastising China for its relatively slack parts policy is Masayoshi Furahata, executive managing director and chief operating officer of Mitsui & Co. Ltd.'s Motor Vehicles Group. He says the Chinese are moving too slowly when it comes to developing the parts sector.

Mr. Furahata calls on the Chinese to develop a better focus on the supplier side of the industry, including greater protection against competition for partsmakers as they ramp up operations.

Partsmakers will have a crack at helping China devise a more cohesive strategy for developing its components industry at an international workshop slated for Oct. 14-19 in Beijing. China's Ministry of Machinery Industry is organizing the event, called the Auto Parts World Development and China's Strategy, Presentation, Seminar and Exhibition (Auto Parts PSE '95).

The conference is expected to focus on auto components that China hasn't developed or hasn't been able to produce in the volume and at the quality and technology levels the industry requires. China's "urgent" list includes electronic engine-management systems, diesel fuel-injection systems, engine valves, automatic transmissions, braking and steering systems, suspension components and air bags.

Auto Parts PSE '95 will be followed on Nov. 15 by the '95 Beijing International High-Tech Auto Electronics Exhibition (BIHTAE) -- the first large-scale international exhibition of high-tech auto electronics ever held in China. It is expected to focus on traffic-safety information, expressway toll-charging and telecommunications systems, as well as on-board devices such as engine, transmission, brake, steering and chassis-control systems.

There remain plenty of question marks -- political, economic, social -- but for many partsmakers, the importance of China's future role appears a certainty. Says an executive with one U.S.-based supplier: "The next 10 to 20 years as we see it, two-thirds of the (auto industry) growth will come in Asia (particularly China). And we need to participate in that."

European

Supplier

B.F.A.

Chinese Partner

No.3303 plant

City/Province

Wuhan/Hubei

Products

Seats & accessories

Supplier

Klockner Humbolt Deutz

Chinese Partner

First Auto Works

City/Province