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China's economy has entered a "new normal" with slowing growth, and the growth rate of the automotive industry has also declined. The development of automotive component enterprises has encountered unprecedented shocks, leading to the emergence of numerous problems. Of course, amid the crisis, some strong component enterprises have proven through their achievements that if they plan ahead, focus on research and development, and implement real transformation, they can still find new development opportunities.
Automotive Component Industry: "Opportunities Amid Crises"
Overall profitability is declining, but enterprises with strong technological potential continue to grow.
The profitability of China's automotive component industry has been declining over the past two years – this is a reality that must be acknowledged. However, at the same time, we see that the profitability of component enterprises with a relatively high technological level is growing.
According to statistics from the annual reports of 71 listed component enterprises in 2013, total operating revenue reached 33.49 billion yuan, an increase of 14.17% compared to the previous year; net profit stood at 1.91 billion yuan, up 11.32% year-on-year, while the average net profit margin was only 6.05%, a decrease of 11.55% from the previous year. The average net profit margin in 2012 was 6.84%, and in 2011, it was 7.53%. Data from the past three years shows that the profitability of component enterprises is continuously declining.
One of the reasons for this continuous decline is that independent component enterprises mainly supply the commercial vehicle sector, and the commercial vehicle sector has only shown positive growth in the past year over the past three years, while experiencing significant declines in the other two years. Looking at the development and changes in China's truck industry over the past decade, there have been five years of high growth and five years of negative growth. The decline in the commercial vehicle sector has seriously affected the component industry.
Imports of key components have increased, while exports of low-end products have struggled.
According to data from the national customs authority, from January to June 2014, the volume of imports of automotive products into China was 48.01 billion US dollars, and exports were 40.023 billion US dollars, increasing by 28.28% and 7.33% respectively compared to the same period of the previous year. China imported automotive components worth 17.726 billion US dollars and exported 30.913 billion US dollars, with both figures increasing compared to the same period of the previous year.
Although exports of automotive components have increased, imports of key components such as automatic transmissions, controllers, and electronic injection systems have grown even more. In recent years, many countries have initiated anti-dumping and anti-subsidy investigations into Chinese automotive components, and the European Union has adopted a tyre labeling law – all of which have seriously affected the export of corresponding components from China.
Rapid growth in foreign investment poses serious challenges to independent component enterprises.
Currently, foreign automotive component enterprises in the Chinese market continue to grow rapidly; they are confident in the future of the Chinese market, maintain technological leadership, while independent products remain at a disadvantage. Bosch, Delphi, Faurecia, and many other foreign companies plan to double their growth in China.
After long-term efforts, foreign automotive component enterprises have firmly occupied the high-end segment of China's automotive supplies market through their technological advantages. Moreover, in recent years, many foreign component brands have begun to sharply reduce prices, squeezing out the low-end market segment that previously belonged to local components. This makes the survival of independent component companies even more difficult. Some new products with large investments, such as ABS, electronic injection systems, etc., have lost their price advantage amid the sharp price reductions of foreign products, making their promotion very difficult.
Automakers' trust in independent component enterprises is declining; discrimination is even evident.
In China, the relationship between automakers and component enterprises has long been in conflict. In particular, Chinese and foreign component enterprises are treated differently, which complicates the situation of independent component enterprises. For example, different calculation standards for domestic and foreign enterprises, refusal to allow participation in fair tenders, non-payment for product development costs to local enterprises – such discriminatory practices by automakers, especially independent automakers, in sourcing have left many local component enterprises feeling neglected and helpless.
An important measure for the transformation and upgrading of independent automakers is the upgrading of the supply chain, with a large number of foreign component brands being chosen. More and more independent automakers are closing their doors to local component enterprises.
A conscious approach by automakers is necessary for the development of a strong component industry. The fate of independent automakers is closely linked to the development of the local component industry. If Chinese automakers and component enterprises continue such relationships, China's automotive industry will face a serious crisis in the future.
Component enterprises lack policy support.
The lack of policy support for China's automotive component industry is an undeniable fact. Currently, component enterprises in China are in a state of unorganized and disorderly 孤军奋战 (lonely battle). This is completely free competition, and the positive role that government authority should play is practically invisible.
Policies adopted in recent years have mainly targeted vehicle manufacturing. The most typical example is new energy vehicles – a national strategic emerging industry. Large subsidies are allocated to automakers, while enterprises producing batteries, electric motors, and other core components receive almost no support.
At a symposium for returned talents organized by "China Automotive News", foreign experts in China's automotive industry unanimously called for: since the development of component enterprises has become the key to strengthening China's automotive industry, can support be balanced in favor of component enterprises, in addition to stimulating and encouraging the development of automakers, to help China's component industry develop better?
Monopolization of investment channels and lack of strong financial support for technological innovation.
Chinese component enterprises have limited investment and financing channels, as well as monopolized access to production factors. In recent years, some local governments have freely provided many production factors such as land and capital to automakers, but support for component enterprises is rarely heard of.
Amid the slowing growth of the automotive market and the survival difficulties of component enterprises, some have reduced investment in research and development to maintain market share and cut costs. Investment in research and development by Chinese automotive component enterprises is already insufficient: a ratio of R&D investment to sales revenue of 2-3% is considered good, while for multinational companies such as Bosch, this ratio exceeds 5%, and some even reach 10%. Insufficient investment in innovation will only widen the gap.
There are serious problems in systems and mechanisms, with great potential for reform.
Chinese component enterprises have great potential for reforming systems and mechanisms, and reform dividends still exist. Some old component enterprises are currently experiencing great operational difficulties due to rigid systems and mechanisms, adherence to old rules, and inability to transform in a timely manner, leading to their marginalization or even elimination.
A large number of private enterprises and mixed-ownership component enterprises, thanks to flexible systems and mechanisms, many of them respond quickly to market changes, have high adaptability, and are currently in a good state of development. Some private and mixed-ownership component enterprises with ideals and aspirations have clear strategic goals and plans, as well as the determination and perseverance to become "everlasting stores".
Institutional obstacles are also evident in alliances between enterprises. There are many associations in China's automotive industry, and industry-university-research cooperation has been carried out for many years. However, many scientific achievements are not translated into practice, and many associations yield no results. Of course, there are positive examples, such as the Automotive Lightweight Innovation Alliance organized by the China Society of Automotive Engineers, and the large automotive component park in the New Area of Hangzhou Bay, Zhejiang Province, which have achieved good results.
There is a shortage of talents, but leading talents in technological innovation are emerging.
During the current Beijing Auto Show, we conducted a survey among automotive component enterprises. The results show that the shortage of talents has led to the technological backwardness of independent component enterprises, which is the main reason for the backwardness of independent automakers. As for the rarest types of talents, engineers and managers received the most votes, followed by sales talents and workers. No enterprise believes that "there are enough talents".
However, we are pleased to see that leading talents in technological innovation are emerging in the component industry, especially university professors and some researchers who are leading innovations and research in key components and technologies, bringing hope to the component industry. For example, Professor Sun Jian from Tsinghua University, who led the development of Suzhou Green Control's AMT, and Professor Sui Shanyan from Beijing University of Aeronautics and Astronautics, who played an important role in the Shengrui 8AT innovation project, etc.
Changes among hundreds of component suppliers
It cannot be denied that there are many problems in China's automotive component industry, but there is no need to exaggerate its shortcomings. We should also see the growth and progress of independent component enterprises. For example, China's "Top 100 Component Suppliers" are leaders in their industry segments, guiding the development of their segments. They have successfully implemented transformation and upgrading, achieved excellence in specialization, some have achieved leapfrog growth after overseas acquisitions, some have entered the supply chains of multinational automakers, some already compete with multinational component companies in key core components, and some are advancing along the path of energy conservation and emission reduction.
Significant progress in specialization development. Practice has proven that the only way out for the component industry is to pursue excellence, specialization, innovation, and uniqueness. To become a champion in its segment, a component enterprise can perfect its products with specialized technologies and a dedicated team. For example, Longcheng Precision Fabrying, a private enterprise located in Wujin, Jiangsu Province, produces only a small part – the engine valve lifter – but occupies 33% of the global wholesale market. The global wholesale market is 180 million units, and Longcheng Precision Fabrying has reached 60 million units, becoming the preferred supplier for engine enterprises such as Bosch, Valeo, Remy, etc.
Acquisition of international advanced technologies through mergers and acquisitions. For example, BYD, by acquiring German company Pury, became the exclusive supplier of battery management systems for BMW's electric vehicles, and also became a supplier of driver management systems for luxury brands such as Audi, BMW, and Mercedes-Benz, making luxury brands bear the "Chinese imprint". Thanks to this, BYD achieved leapfrog growth, with revenue reaching 7 billion yuan.
Increased weight in certain industry segments and enhanced international competitiveness. In the field of automotive wheels, Zhejiang Wanfeng Auto Wheel Co., Ltd. has entered a stage of in-depth strategic cooperation with international automakers such as GM, BMW, and Ford. It is not only a global strategic supplier to GM and BMW and the exclusive supplier to Land Rover in China but also successfully entered Toyota's system in Japan last year. In the field of airbags, Jinzhou Jinheng Automobile Safety System Co., Ltd. has successfully overcome the suppression of multinational competitors such as Autoliv, TRW, and Takata in recent years and entered the supply system of multinational automakers such as Volkswagen, Peugeot, and Citroen. In addition, there are many local enterprises that have become global sales leaders in their segments: for example, Jinzhou Wanyou in shock absorbers, Far East Transmission in commercial vehicle drive shafts, and Faust in commercial vehicle transmissions.
Successful product transformation and upgrading. For example, Bohai Piston – a leader in commercial vehicle pistons in China – has successfully expanded into the passenger vehicle market in recent years. It has not only established in-depth cooperation with independent brands such as Geely, Chery, BYD, Jianghuai, and Changan but also successfully entered the supply system of European and American automakers. Thanks to its excellent quality, it has won the favor of the procurement department leaders of Volkswagen Group in Germany. In 2013, the enterprise began mass supply to Volkswagen Germany; in 2014, it passed Daimler-Benz's VDA6.3 audit with a high score of 91.4 and became an A-level supplier to Daimler-Benz – one of the world's four largest automotive groups. In addition, there are many small innovative enterprises with great growth potential. For example, Kunming Guiyan Catalyst Co., Ltd., after long-term research and development of three-way rare earth catalysts for automotive emission purification, successfully entered Volkswagen's supply system, while Lopal Petrochemical began developing automotive urea products a few years ago and now occupies 70% of the automotive urea market.
Breakthroughs have been made in key components, and the innovation model has fundamentally changed. In recent years, local component companies have achieved important breakthroughs in key and core products such as automatic transmissions. Fast's automatic transmissions for commercial vehicles are already used in small quantities in buses and dock tractors. After 7 years of research and development, Shandong Shengrui Transmission's 8AT has entered a key stage of industrialization. Mass production of the 8AT will not only undermine the position of foreign investors in this field but also have a far-reaching impact on the development of China's independent automatic transmission industry.
We are particularly pleased to see that today, local component companies are no longer focused solely on scale but pay more attention to product quality; they are no longer satisfied with revenue growth but pay more attention to operational quality; instead of focusing on the competitiveness of individual products, they are more focused on the competitiveness of the entire system. This means that the previous extensive business model is gradually being abandoned.
Automotive components – the main arena for automotive technological innovation
Today, the situation of China's automotive component industry is "opportunities amid crises". The challenges facing the industry are serious, but the large and diverse market demand, the changing industrial structure, and various merger and reorganization opportunities in the global market provide a chance for breakthroughs.
Currently, judging from the development trends of China's automotive market, the main arena for future innovations and development of China's automotive industry is automotive components. Components are the foundation of the automotive industry, and automotive production technologies stem from technological innovations in components.
At present, the integrated innovation capability of vehicle production has reached a high level, but the development level and innovation capability of components lag behind the pace of vehicle production. This creates opportunities for innovation and development in the current and future automotive component markets. This opportunity is created by the market, which inevitably determines the allocation of resources. Under market-based resource allocation, private enterprises and mixed-ownership enterprises will become the main force that seizes this opportunity. These companies will not only be able to take advantage of the opportunity but also transform it into capabilities. I have a hunch that their international capabilities will grow unimaginably, and innovations in two areas – new energy and the internet – will be astonishing.
