The automotive industry is taking a major turn to the East and asking its suppliers to come along for the ride.
Like the cell phone, electronics and computer industries before them, automakers are shifting production to China, seeking not only low-cost production of components, but complete car manufacturing for a nation that could be among the top five auto consumers by the end of this decade.
General Motors Corp. saw its sales in China more than triple in 2002. Volkswagen AG will generate an estimated 15 percent of its global pretax profit from China this year.
By 2015, China's auto production capacity will approach 14 million vehicles annually, placing it near the same level as the combined countries of Western Europe and just a few million vehicles shy of the record levels of production in North America.
With that kind of growth, carmakers are demanding that their global suppliers step up with some kind of presence in the market.
``To support this level of growth - the fastest in the world - we must act quickly to understand the needs of our manufacturing operations, to assess the Chinese supply base and see how we accelerate our local content in China,'' Bo Andersson, vice president of worldwide purchasing for GM noted in an undated letter.
Officials for the world's biggest automaker visited more than 35 suppliers during their visit to GM's Shanghai plant, part of a ``starting point in order to encourage our current existing supply base for moving into China and the Asia-Pacific region,'' the letter said.
Some major suppliers already are there. Delphi Corp. did $700 million worth of business from its 13 manufacturing sites in China last year, a 35 percent increase from 2001. Its multimaterial manufacturing base there makes Delphi the self-proclaimed largest wiring harness manufacturer in China, the largest battery supplier to automakers and the largest catalytic converter maker.
``By the end of 2003, China may be the world's fifth largest auto market. There will be 42 million qualified buyers by the end of this year,'' said Jinya Chen, president of Delphi Corp.'s China operations. ``If you look at this background, no one can ignore this market.
``Look at the global markets,'' Chen said. ``China, the Asia-Pacific region especially, is really a very, very hot place to grow.''
The new demands for an automotive presence in China has suppliers anxiously seeking out information. Consultants with HCI Group Inc. of Troy, Mich., had to add a second session to HCI's January seminar on doing business in China because of overwhelming demand.
The Original Equipment Suppliers Association is hosting a special conference March 3 during the Society of Automotive Engineers' World Congress in Detroit, and Canada's Automotive Parts Manufacturers Association had its own seminar in February.
China has taken steps toward creating a homegrown auto industry in the past, starting in 1956 with the creation of First Auto Works in Shanghai. But each move toward a strong industrial base was brief, with a few years of growth followed by a change in policy that brought it back down, said Denton Dance, senior manager of Asia-Pacific forecasting for JD Power & Associates.
Until the 1980s, official government policy banned private ownership of autos, so despite a population that topped 1 billion, annual sales were measured in the thousands.
But a free market economy is taking shape now. China's entry into the World Trade Organization last year is bringing a real visibility to economic policies and potential.
There is also a newly developing middle class, especially in urban areas, eager for well-built, if low-cost, cars.
``The Chinese are becoming much more particular about their cars,'' Dance said. ``Gone are the days of passing on old technology and outdated platforms. The consumer wants cars that are built nationally that are able to be exported to other markets.''
Volkswagen has found success with its Go model since it first established its base in Shanghai in 1984. GM launched production under its Buick brand in 1988. It now has five midsize sedans in production from its joint venture, also in Shanghai, led by the Sail model.
Ford Motor Co. launched production of its Fiesta from a new assembly plant in Changan in January.
``They all have big plans for China,'' Dance said. ``Just over the last 10 years, the market has gone from 600,000 units to 3.3 million units.''
And they want their regular suppliers to be in place to work with them.
``Everybody is working on a global platform,'' said Al Cotton, public affairs manager for Nypro Inc. of Clinton, Mass. ``The automotive folks are not interested in making a European car and a China car and a Latin American car. They're making world cars and they want a global parts supply.''
Nypro entered Asia in the 1970s, expanding into China during the past 12 years as its customers in the electronics and cell phone industries shifted more and more of their production to the nation.
Now it is transitioning its plants to expand its automotive customers.
``We can take a machine that's making a cell phone part now and make a dashboard gadget just as easily,'' Cotton said.
The firm has 10 plants on mainland China as well as tooling and engineering centers in Hong Kong. It will open another two plants in China this year.
``The automotive industry - particularly the Tier 1 [suppliers] - are on the same trajectory as the cell phones and electronics have been for a while,'' Cotton said.
The company is busy showing its capabilities in China to customers now, and expects a big jump in contracts within just months.
That business, and the push to expand, is coming from more than just the automakers. Global suppliers like Delphi are looking to their own supply base for global support.
So far, the homegrown Chinese industry is doing well in basic processes: shoot-and-ship injection molding, for instance, Chen said. But they often lack the engineering and technical capabilities of North American and European-based firms.
``To some extent, we still have to buy a lot from the U.S., but eventually that will change,'' he said. ``The trend is to purchase more from China. It's cheaper, as long as we know how to control quality and delivery. Our priority is to buy from China if we can.''
That brings the need for global capabilities back to smaller molders that must decide if they are willing or able to follow their customer to China.
``How global do you want to be?'' asked Gene Chou, chief executive officer of Detroit China Logistics Ltd., which specializes in linking auto parts makers in North America to Chinese manufacturers. ``That's a real long-term strategy you've got to make for your corporation.''
Firms like DCL hold a middle ground for suppliers that may need to test the waters in China. With an office in Ann Arbor, Mich., Chou can serve as matchmaker between suppliers in North America and 500 companies in China operating in five key areas: plastics, rubber, electronics and metal casting and stamping.
While larger companies may take aim at one of two business ventures in China - a wholly owned foreign enterprise or a joint venture - smaller firms may want to first develop a strategic alliance with a Chinese processor or simply contract for the manufacture of low-profit items.
Detroit China Logistics and its rapidly growing number of competitors can establish relationships and coordinate shipping and delivery in North America of Chinese-made components.
China carries risks beyond the cost of starting production as companies now operating there in other fields can note. Proprietary information is harder to maintain, and patents can be easily lost if companies are not paying attention.
The cultural realities of operating in China also require that companies have someone on the ground with a long and extensive background to doing business there.
Infrastructure also is not fully in place in some areas, with poor roads and bad communications systems. But the country is on a rapid pace to improve, and as new technology comes in, it consists of high-quality operations, according to Desmond Wong, national director for China for the consulting group Ernst & Young LLP.
``Once houses are wired for telephone service, they will begin with fiber optics. They'll leapfrog right over the old technologies,'' he said.
The fact is, the auto industry is growing at a rapid pace in China. Ignoring that fact could mean risking a globally competitive strategy, Wong said.
``There are some industries - consumer goods, office machines, cell phones - where the game is over. China has won,'' he said. ``They are coming. It is a matter of time, not if it will happen.''