Taiwanese Parts Suppliers
Tooling Up for China's Car Boom
China is rapidly becoming the world’s biggest auto production and consumption market. How will Taiwanese businesses with an established footing in the mainland compete for a piece of the pie?
Tooling Up for China's Car BoomBy Liang-Rong Chen
From CommonWealth Magazine (vol. 368 )
Taiwan's electronics industry has been making noise about delving into the automobile electronics sector for quite some time now, but so far there has been more talk than action. One major reason has been safety concerns, for every element of a car's structure potentially impacts the entire car's safety. What automaker would be willing to take such a big risk and delegate responsibility to new players in the automobile industry?
One such company is located in China, in Anhui province's Wuhu, on the lower reaches of the Yangtze, more than 300 kilometers inland from the coast.
Four kilometers from the river in an earth-colored medium-size plant building, several hundred female workers in blue uniforms deftly attach small connectors to bundles of red, blue, and green wires. The finished products are then sent to the nearby Chery plant for assembly. Each automobile requires from several hundred to over a thousand of these bundles to transmit electronic signals.
A few months ago half of the shares of this company, Ruichang Electronics, were quietly acquired by HonHai, while the other half is held by the Chery Group. Following the company board's late-March meeting, HonHai will formally be named one of Chery's more than 40 suppliers.
What is it about Chery that could convince a company like HonHai decide to purchase a major stake? Founded just eight years ago and already China's fastest rising automobile company in recent years, Chery established sales of 300,000 vehicles in 2006, nearly the total volume of cars produced in Taiwan last year. Not resting on those laurels, Chery chairman Yin Tongyao has set a production target of one million cars for 2008.
HonHai is not the only Taiwanese electronics company that has pinned its hopes on Chery, as the company's cars are now also being fitted with connectors from Hu Lane and engine control units from Delta Electronics. In fact, Delta Electronics chairman, Bruce C.H. Cheng paid a personal visit to Chery last September in search of further cooperative opportunities.
“Right now everyone is trying to get a piece of Chery,” relates Chen Chien-chang, director of the Taiwanese Business Association of Wuhu and chairman of Good Electronic. His thoughts echo those of most Taiwanese business people across the strait at this time.
Huge Shakeup in Automobile Market
These electronics industry pros, seasoned veterans of business around the globe, are getting whiffs of a familiar smell in the autotronics field – the reshuffling of the value chain and outsourcing.
The personal computer revolution in the 1980s in Silicon Valley helped create the several trillion-dollar Taiwanese electronics industry. In recent years another explosive shakeup has taken place in the US automobile industry, with its epicenter in Detroit.
Facing bankruptcy, the parts and components divisions of General Motors and Ford established the independent companies Delphi and Visteon. In the effort to drastically reduce costs, they have now loosened the once closed supply order and are aggressively pursuing a global procurement strategy.
“They're going to take after IBM and Hewlett-Packard, diffusing across the board as they look for outsourcing opportunities in the Third World,” says one venture capital executive well versed in the automobile industry. “We call it the (auto industry's) Third Wave Revolution.”
This hard and fast tide of outsourcing is flowing nearly entirely into China. According to US-based market research consulting firm BBC, the value of automobile parts and components exports from China (including those invested by Taiwanese and overseas businesses) will reach US$58 billion by 2008.
At the same time, a car craze has seemingly sprung out of nowhere in China, where the average annual income has only barely surpassed US$1000. In just the past few years, China has already become the second largest new car market in the world, and each of the world's top nine automobile manufacturers has established production facilities in China. Industry sources estimate that China's automobile market will exceed 10 million cars by 2010.
“These days no one doubts that China will be the biggest market and biggest manufacturing base in the world,” relates the vice president of Pak-Link Opportunity Fund. A member of the Yulong Group, Pak-Link is the first venture capital fund in Taiwan aimed at Taiwanese autotronics vendors in China, worth approximately US$100 million at the moment.
This executive estimates that two years from now, at the most, a group of unknown autotronics vendors from Taiwan will become new stars on the Hong Kong stock exchange based on their outstanding achievements in Detroit.
Potential Goldmine, Only the Beginning
In his firm's 2006 report on the Asian automobile component industry, Merrill Lynch analyst Mark Chang predicted confidently that we are only seeing the beginning of the outsourcing trend among the world's major automakers.
Recognizing the automobile contract manufacturing industry as a potential goldmine, Taiwan's electronics industry has set its sights beyond just electronics equipment, which accounts for less than 20% of the average car's value. The industry is currently abuzz with the news that HonHai's Shanxi production base, under the watchful eye of a group of former Toyota executives from Japan, is poised to make big inroads into the aluminum car components sector.
Meanwhile, numerous notebook computer case and components makers from Taiwan are aggressively exploring the prospects of entering the auto body plastics and panel sectors, which share similar production processes. Geared up for the challenge, they are confident in the knowledge that notebook computer cases are more finely finished than plastic parts used in cars, and with volume in the tens of millions of units per year they feel that translating their “high-tech” experience to the comparatively conventional automobile industry will be a relatively simple task.
However, this attitude irks the likes of such established players in the automobile parts and components sector as Tong Yang Group, whose chairman Raymond Wu says, “Let them all come and try it.” With a rankled expression on his face, he adds, “They think it's easy to make money in this business.”
Leaving other areas aside, even the most basic OEM approach is far different. Whereas in the electronics industry just one or two manufacturing bases can supply all the world's customers, the automobile industry is much different. Other than small components that are easy to ship, the automobile industry, which puts a premium on Just-In-Time supply (JIT) and zero inventory, generally requires suppliers to set up facilities close by or take full responsibility for any delays. (Chery levies a fine of RMB1000 for each minute late.)
Unique International Competitiveness
In the past Taiwan's automobile industry was not considered a major competitive force around the globe, largely because a plethora of companies were involved in the business, yet no single company could achieve economy of scale in R&D and exports. However, this erroneous industry policy inadvertently resulted in the unique competitiveness of Taiwan's automobile parts and accessories firms. For example, Tong Yang has for years supplied seven Japanese manufacturers and one American company (Ford) out of Taiwan, enabling it to gain intimate familiarity with each company's technology. This is extremely rare in the world's automobile industry, which is traditionally divided into cliques. “No vendor in the world is as lucky as Tong Yang,” says Raymond Wu.
As a result, when companies with deep ties to Taiwan like Ford, Toyota, Honda and Nissan prepared to move into China, they naturally leveraged the cultural and linguistic advantages of their Taiwanese suppliers and took them along with them. In addition to Tong Yang, such major Taiwanese suppliers as Liu Ho, GSK, and Kenmos have also set up extensive operations in China.
Hearing Footsteps Close Behind
According to statistics from the Taiwan Transportation Vehicle Manufacturers' Association, over 300 Taiwanese automobile parts and components firms have already established production facilities in China at present.
Although international brands already occupy 60% of China's automobile market, over 100 small local automobile firms are angling for the remaining 40%. The market crude and chaotic, over the course of competition the most unsettling factor for Taiwanese businesses is the sound of pursuers' footsteps. Often even bolder and harder working, local Chinese firms are a lot like their Taiwanese counterparts of three decades ago.
Taiwanese businesses are forced into both offensive and defensive roles on the battlefield in China, as each parts and components company has a major Western company above it and a local Chinese pursuer below.
In this brave new world of brutal competition, those who do not move ahead of the pack get left behind.
Translated from the Chinese by David Toman