Auto parts driving Chinese global car strategy

A two-year-old factory near Kansas City, USA, provides a good look at China’s strategy for becoming a global force in autos.

The Missouri plant’s operator is controlled by China’s No. 1 carmaker, but the factory doesn’t build cars. Its about 200 workers assemble door handles, centre consoles and other parts that ship to a nearby General Motors factory, which fits them into Chevrolet Malibu sedans.

Beijing’s industrial planners have identified car-parts plants like this as a vehicle into the world’s auto markets. By first learning to make and sell car parts in markets like the US, leaders in China’s auto industry say, companies can then use the lessons to move on to selling cars overseas.

“By running factories there and hiring local people” in the US, said Dong Yang, a vice-president of the government-backed China Association of Automobile Manufacturers, “it will pave the way for the Chinese to build and sell cars there ultimately”.

The Riverside plant’s parent is a subsidiary of SAIC Motor Corp, China’s biggest carmaker by sales according to the auto association. SAIC, which is a joint-venture partner with GM in China, doesn’t sell cars in the US, but its Yanfeng Automotive Trim Systems, which runs the Missouri plant, has emerged as a significant car-parts presence in the US since entering in 2010.

For decades, China has harboured ambitions to be an auto powerhouse rivalling Japan. But it is taking a detour from the Japanese model

Yanfeng has won contracts for the Malibu and Fiat Chrysler Automobile’s Grand Cherokee. It built the Riverside plant in 2013 and plans another in Tennessee to supply Volkswagen’s Chattanooga factory. It bought control of Johnson Controls’s interiors unit this year and its $US8.5 billion in 2014 revenue, including that unit’s revenue, outpaced those of US companies that until recently dwarfed it.

Other Chinese companies have built factories or made acquisitions in the US to supply parts such as steering systems, windshields, seals and batteries. In the US, “I think there are opportunities for even the small parts makers” from China, said David Wang, Yanfeng’s deputy general manager of the Americas. “As for a Chinese carmaker coming here? Perhaps one day, but I don’t see that happening any time soon.”

For decades, China has harboured ambitions to be an auto powerhouse rivalling Japan. But it is taking a detour from the Japanese model. Firms like Toyota gained toeholds overseas by exporting cars. Later, they built auto-assembly plants outside Japan. Their parts suppliers followed, often building factories nearby.

Chinese carmakers haven’t made that first step in mature auto markets like the US. When Zhejiang Geely Automobile displayed a car at the 2006 North American International Auto Show, its executives boasted the four-door could sell for under $US10,000 in the US. Chery Automobile in 2007 had plans to bring vehicles to the US. But Geely, Chery and other Chinese carmakers still don’t sell cars in the US.

A spokesman for Geely said it did not have short-term plans to sell cars in the US. but had teamed up with Volvo, owned by Geely’s parent holding company, to develop a platform for cars that “will be exported to the US one day”. Chery didn’t respond to inquiries.

Chinese carmakers do make and sell cars in markets such as Russia, Egypt, Ukraine and Thailand. But Beijing’s big thrust is to subsidise its auto industry’s move into parts. In its latest guidelines for China’s auto industry, in 2009, the National Development and Reform Commission, China’s top economic-planning agency, required the country’s auto-parts makers to go all out to enter the global purchase network.

The value of China’s acquisition deals abroad in auto-parts grew to $US733 million last year from $US125m in 2013

Chinese car-parts makers have built dozens of production lines in the US and elsewhere, sometimes using buildings previously housing domestic companies’ manufacturing lines. This year, for example, Fuyao Glass Industry Group began making windshields in Moraine, Ohio, in a facility GM closed in 2008.

And Chinese firms are buying into parts via acquisitions. The value of China’s acquisition deals abroad in auto-parts grew to $US733 million last year from $US125m in 2013, according to Dealogic. The 2015 figure as of July was about $US9bn, which included a $US7.7bn bid for Italian tire maker Pirelli.

“They’re a small but growing presence in the market,” said Patrick Steinemann, co-head of Asia Industrials at Bank of America, who estimates Chinese buyers accounted for about 5 per cent of global deals in auto parts last year. He said China’s share of such deals could be as much as 25 per cent in a decade.

In the US, Chinese makers have often moved into relatively low-tech parts such as steering systems, window glass and trim panels — the types of components some US parts makers have abandoned as they move towards higher-tech components with better profit margins.

Chinese parts makers are not competitive at all because of a lack of technology and brands

Chinese companies’ willingness to pick up what are often low-margin parts had played to their manufacturing strengths, said Mark Wakefield, managing director of the automotive practice for consulting firm AlixPartners. And they were using these operations, he said, to learn how to build world-class parts.

A Chinese official involved with auto policy said: “Chinese parts makers are not competitive at all because of a lack of technology and brands. Overseas acquisition is the shortcut to help them join the global supply system.”

It will take years to see if China’s strategy works. China is still a relatively small parts player in the US and other mature markets. Yanfeng, for example, is the world’s No. 26 supplier by revenues and its $US8.5bn in 2014 sales were a fraction of Robert Bosch $US44bn and Magna International’s $US36bn.

While Chinese firms have relations with global carmakers at home, “they still have to earn the business in other places like the US, and that means going against some hard competition,” says IHS Automotive analyst Michael Robinet. “It’s not just who can save the carmaker money.”