In Downturn, Chinese Suppliers Refocus on Quality, Reliability

China's Automotive Supply Base is not faring well, despite what most industry observers agree has been a remarkable performance by the country's auto makers so far this year, with domestic sales up 14% through May.

So says Sherman Adams, a director at business advisory firm BBK. “China's suppliers are feeling the pain of a declining global auto industry,” he says at a GlobalAutoIndustry.com event in Troy, MI.

Many Chinese suppliers, especially those reliant on exports, are feeling the brunt of the new-vehicle sales slump in Europe and North America. Aluminum wheels for fitment in OEM and aftermarket applications, particularly have been hard-hit.

“China's capacity for aluminum wheels is about three times the world's usage of aluminum wheels,” Adams says of recent research by his firm for an aluminum-wheel manufacturer. “And I'm sure there are a lot of (other industries) with excess capacity in China right now.”

Until the global recession hit last year, profitability for Chinese suppliers was a given, due to the country's low labor costs and low-tech manufacturing operations.

But Adams says the advantage of producing parts in China has lessened, as wage rates have shot up.

As well, many suppliers failed to understand, or underestimated, the time and cost of supporting export programs promoted by the Chinese government, often resulting in costly mistakes or delays.

While China's supply base is becoming more capable in terms of manufacturing and engineering, Adams says domestic suppliers “still have a hill to climb” before their engineering capability is world-class.

“The future requires Chinese manufacturers to make dramatic improvements in order to remain competitive and survive,” he adds.

Adams advises Chinese suppliers to work on improving cash flow, reducing inventory and improving quality. “Profit margins are small enough now that first-time quality is a major concern.”

Janet You, former program integration manager for Chrysler LLC's cars built in China, experienced firsthand the headaches that can befall a Western partner as a result of poor supplier quality controls.

You says the auto maker often had reliability issues with parts from its Chinese supply base, noting one particular instance with faulty brake lines in Chrysler Sebrings built in China.

“We fought on that (with our joint-venture partners) quite a few times, and we started to ship parts from our current supplier in the U.S. to China for that vehicle line,” she says.

Typically, the Chinese partner selects the suppliers, based on longstanding relationships with certain companies, You says, making it difficult to procure parts from another company.

Employee turnover also was frustrating, because Chrysler and its partner firms had to conduct training. “I know 80% of the staff left (in one instance),” she says.

Adams, based on his time as a purchasing manager for General Motors Corp. in Shanghai, details the differences among foreign OEMs sourcing parts in China.

Referring to Volkswagen AG, he says, “Germans are still strong in engineering, and they want to validate and verify their products coming out of China suppliers.”

European OEMs overall value experience, operational excellence and the ability to “produce quality products consistently” while meeting standards.

North American OEMs are focused on delegating responsibility to suppliers and focus heavily on reaping significant cost-savings.

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