Survey shows bright outlook for China auto market

The latest Global Automotive Barometer survey indicated a positive business climate in the automotive supplier industry and a continuing strong momentum of the Chinese auto market.

According to the survey, the outlook for the global automotive supplier industry looks much more favorable than it did a few months ago.

Among about 200 executives from global automotive suppliers who took part in the survey at the end of last month, more than 90 percent of suppliers now expect a more positive business climate than last year, and three-quarters of participants questioned foresee double-digit business growth.

The survey, conducted by A.T. Kearney, a global management consulting firm, shows that the growth prospects for suppliers are predominantly seen in China. As a consequence, the establishment of local capacities in China – not only for manufacturing but also for new product engineering – is set to be increasingly important.

On the other hand, suppliers are also aware of barriers to market entry and growth in China. Competition is perceived as being more intense than in their respective home markets, while labor costs are expected to rise significantly, and the majority of suppliers see weaknesses in the infrastructure and in legal protection.

"Whereas at the end of last year, growth expectations for 2010 were quite modest, the majority of automotive suppliers now view prospects for the next 12 months more positively. The majority of participants in the survey are even envisioning double-digit growth in 2010," said Dr. Martin Haubensak, partner of the Global Automotive Practice at A.T. Kearney. "Only 4 percent expect a negative business climate this year. This appraisal is supported by an anticipated increase in orders in the current year."

According to the survey, expectations with regard to supplier insolvencies are also changing: while one year ago most participants in the Global Automotive Barometer survey foresaw an increase in insolvencies, only one-third are of that opinion this time. More than one-third even expect a decrease in financial distress.

However, the skeptical view of suppliers regarding the stability of automotive OEMs (original equipment manufacturer) remains unchanged. Most suppliers still expect some of their OEM customers to fail economically over the next three years.

"It is evident that suppliers are again preparing for growth. The majority of suppliers surveyed confirm that they are investing in new fields of business as well as in regional expansion," said Haubensak.

Large-scale acquisitions do not seem to be on the agenda of suppliers – this was not the case before the crisis, according to him. For example, less than 20 percent of participants questioned are currently considering acquisition of competitors.
China: Driving force of growth.

As China emerges as the biggest auto market globally, it is expected to remain the driving force behind industry growth, according to the survey.

Two-thirds of respondents expect a further increase in the importance of China for their business. Accordingly, they regard it as increasingly important to establish local manufacturing capacities in China, both to supply the Chinese market and to serve as a global export hub.

Moreover, while application engineering has already been established in China by the vast majority, participants in the survey now consider the localization of core product development in China to be increasingly important for the future.

"The complex industry structure in China, with private and state-owned OEMs and foreign brands with multiple joint ventures, all with different buying criteria, also presents challenges to suppliers," said Stephen Dyer, principal at A.T. Kearney's Greater China automotive practice.

According to the survey, supplier executives indicated a preference for working in China with European and US joint venture OEMs in the short term, but recognize the long-term benefits of working with Asian and local Chinese OEMs.

"Suppliers expect future winners among the Chinese OEMs to be those who adopt extensive platform-sharing strategies across vehicle models, shift to a true 'pull' manufacturing approach, and establish overseas assembly operations rather than simply trying to export complete vehicles," said Dyer.

Based on the survey results, suppliers should take into account the following key challenges in China: increasing labor costs, unreliable infrastructure, energy supply and transportation of goods, and limited legal protection. The main positive aspects on the other hand are: high workforce availability, proximity to higher education, and good availability of raw materials.

"Bottom line, the opportunities clearly outweigh the risks. The road to success, however, needs to be built carefully," added Haubensak.

Regarding the challenges that China's auto market is currently facing, Dyer says one issue is manufacturing capacity. "Some China OEMs have established very aggressive sales and production plans for this year, which are supported by corresponding investment. Because some OEMs are behind their aggressive plans, a price war is possible in the second half of this year, especially among the small vehicle segments," he said in an interview with chinadaily.com.cn.

According to Dyer, another challenge for China's auto industry is that in the long term, Chinese automotive companies must wean themselves from relying primarily on buying technologies from other auto markets, which actually has been a very successful strategy so far, and develop their own internal product capability. Only by doing this can Chinese automakers expect to succeed as truly global players.

(Source: China Daily)