Earlier this year, forecasters with auto analyst company J.D. Power & Associates estimated that consumers in China would buy 15.2 million vehicles in 2010.
With the year only half over, they revised that estimate up by another 400,000 vehicles. The company also has printed an estimate that China will reach an annual level of nearly 20 million light- vehicle sales within five years.
But even that number, they admit, may be low.
“You're talking about the largest auto market in the world, and it has not even begun to breathe,” said Tim Dunne, director of global automotive operations for J.D. Power of Thousand Oaks, Calif. He spoke during the Center for Automotive Research's Management Briefing Seminars, held Aug. 2-5 in Traverse City.
Suppliers that once rushed to China for low-cost labor to build parts for export to Europe and North America are now focusing on local sales. And automakers are increasing their production of cars and trucks specifically for sale there.
Southfield, Mich.-based Federal Mogul Corp. posted $200 million in sales in China in 2009, including plastics used in parts like lighting, seals and wipers, which it makes at 12 factories there. Through the first two quarters of 2010, the firm saw its sales in China increase by 63 percent, said Ramzi Hermiz, senior vice president of the vehicle safety and protection group.
“It's not just about going to China because it's lower cost,” he said. “It's because it's a 15 million-vehicle market and growing.”
Key Safety Systems Inc. of Sterling Heights, Mich., has put an increased focus on China as part of its global strategy, said Jason Luo, president and CEO. In 2009, China made up 6 percent of its overall sales, up from less than 1 percent in 2003. Its seven production sites, including manufacturing of steering wheels and plastic components for air bags and seat belts, will produce about $200 million in sales this year. By 2015, it expects to sell $500 million there.
Key further backed its manufacturing investments in China for long-term growth when it built a $20 million technology and research center in Shanghai at a time when it had only $9 million in total sales in China, Luo said.
Caution signs
But those impressive numbers and growth curves are no guarantee of success. The market is fragmented, with both international and Chinese automakers reaching for a piece of growth. There are worries about a potential bubble in the equity and real estate markets. Rising inflation could affect future purchases.
“Its complexity has grown tremendously,” said Ling Wu, managing director of investment and consulting group Amherst Partners LLC of Birmingham, Mich. “Doing business with local Chinese [carmakers] is not easy.”
The image of merely making low-cost parts for low-cost cars to suit an emerging market is also flawed, Hermiz said.
“Growth is being driven by technology,” he said. “Everybody in China has low-cost labor, so what's your differentiator? If your business is being driven by quality and technology, then you have the same discussions [with Chinese customers] as you have with customers anywhere.”
Chinese car buyers look for the same quality and styling cues as buyers in Japan, Europe and North America, Dunne said. Automakers are looking for suppliers that can help them improve their own quality standards.
Luo also stressed the importance of building a local operations team, with engineers and managers who know the economy and culture and speak the local language.