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back to index backCHINAtalk May,  2005

Pricing pressure in China set to intensify

Falling market puts pressure on auto industry suppliers 

The slowdown in the Chinese auto market is compounding an already rapidly deteriorating situation in the market for some European suppliers, particularly for some of the German companies.

Market participants are generally not worried that China would show similar developments to the Korean market or Brazil in the recent past. At the recent Shanghai Auto Show there was a fairly high degree of confidence in the management of the economy by the government, and the size and potential of the Chinese market made its case different, according to senior executives at French and German suppliers.

But rapidly falling vehicle prices in China and the shrinking margins of vehicle makers are putting pressure on suppliers to reduce their prices too.
Whereas in the past German suppliers have been able to ask prices of up to twice the level in Europe, some supplier executives have said that they now expect pricing levels in China to fall below home market levels.

Prices for components vary across sectors in China, but one supplier reported that prices had fallen from 50% above European levels in 2000, to below European levels today.

For a large number of products, costs in China are already lower than in North America or Europe.

Suppliers say that this price pressure has driven them to reduce specification to below international standards. And component price pressure in China is set to intensify as established Chinese market participants in the supplier industry are facing local competitors.

Several international suppliers at the Chinese Auto Show in Shanghai commented that the development of local "copier" suppliers had been much faster than expected.

At the same time the Chinese market is less prepared to compromise with older, cheaper technology than other fast growing emerging markets and achieving quality levels that match European and US levels is an important enabler for export growth,

Furthermore the Chinese Automotive Policy (CAP) that came into effect on the 1st April 2005 introduced a higher requirement for local components, although suppliers report that it can still be difficult to find high-quality materials and components for technically demanding complex products.

Volkswagen faces dilemma on whether to stay with massmarket

For European suppliers that have grown with Volkswagen in the Chinese market, the German group's loss of market share sharpens their problems.
The volume of the Volkswagen operations in China has been put under considerable pressure with large stocks being built up.

Volkswagen is reviewing whether to cut costs to pursue the growth segment in the market in lower-priced segments and compete with entrants from Hyundai and local producers. The company faces the challenge of making substantial cost reductions to preserve its share in a falling market, but clearly runs the risk of damaging its brand position and may only worsen its already substantial deterioration in its financial position in the short run.

Because of an early lead for Volkswagen in China, German suppliers were among the first to set up plants there, and the larger groups such as Bosch, ZF Friedrichshafen and Mahle now have very substantial operations there.
Volkswagen's core suppliers in China, which have grown with the group, are now facing a challenge of winning business, where possible, with the new Korean and Japanese transplants in the market, and picking the winners among the emerging Chinese players.

Cost of participating in the Chinese market is rising

One reaction has been to increase investment in development capabilities in China and establish new component production facilities with the latest production process technologies, operating at a larger scale than the smaller assembly operations established a few years ago.

A string of recent announcements of investments by leading Western suppliers underlined how important the global automotive industry's major growth market over the last few years remains.

* Bosch announced the opening of a technology centre in China in Suzhou Province, 80 km west of Shanghai. Bosch is investing €50 million in the facility which will employ 220 people on automotive electronic and brake systems. Bosch expects to employ 300 people on the site by 2008. In total Bosch plans to invest more than €500 million in fixed assets between 2005 and 2007, mostly on production capacity for automotive equipment.

* TRW announced an expansion of production facility in Anting producing airbag control units and steering elements. In January 2005 TRW had opened a new technical centre in Shanghai and the expansion of the plant is intended to keep pace with growing local demand, the company said.

* GKN announced a new joint-venture in Henan province to produce more than 3 million cylinder liners a year for trucks for the Chinese and export markets. Production is scheduled to begin in 2006. The investment will total £16.4 million.

* Metaldyne announced the opening of two new manufacturing facilities, one in Hangzhou to produce steering knuckles for a North American automotive company from August 2005, the other in Suzhou to produce power train components from Q1 2006.

* Pistons market leader Mahle broke ground on a new headquarters and technology centre south of Shanghai. The company is investing €8 million in the new site. At the beginning of 2006 a group will consolidate its six Chinese plants under a new holding group there. The company is also investing in a new filter plant, one of three that the company plans to serve the major regions of China. In total Mahle expects to invest €30 million in China in the next few years and is assuming that by 2010 sales in China will triple.

*The Schaeffler Group, made up of INA, FAG and LuK, announced plans to open an automotive engineering centre near Shanghai. The centre is due to open at the end of 2006, and by 2008 will employ more than 150 engineers on clutch, engine component and wheel bearing design and development. The Schaeffler Group expects to increase its number of employees in China from 1,200 in 2005 to more than 4,000 by 2010.


Source: SupplierBusiness newsletter - GAI

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