There Will Be No More 3rd Tier Suppliers in America!

Wednesday, November 8, 2006 9:47

About 6 months ago while speaking to a supplier coated stamped parts for one of our U.S. clients, we were told “There Will Be No More 3rd Tier Suppliers in America!”…. and as he was one of two e-coaters in the area he said this with a smile on his face..

His theory, either the American companies will move to China, or Chinese companies will receive the orders. At the time, I would not have put all my chips down on his theory, however with American auto experiencing probably their worst summer on record, I am beginning to see the logic.

This theory, and proclamation, are backed up in an article released today in the Wall Street Journal entitled As Barriers Fall in Auto Business, China Jumps In (subscription only). For those not able to read the article, the following points are highlighted:

  • Automobiles are becoming commodities, and the movement of U.S/ E.U. auto suppliers to China makes it easier for Chinese brand in the future.
  • Foreign auto makers have not only supplied Chinese suppliers with the equipment and components necessary to make finsihed parts, but they have imparted on them the knowledge necessary to build those component parts themselves.
  • Foreign OEMs are now buying quality parts from Chinese suppliers that were once not possible.

Through my personal experience of visiting an infinite number of shops within a couple hours of Shanghai that are able to stamp, extrude, inject, and coat it should not be a surprise that Ford recently announced that it will double its purchasing of Chinese parts, and that it is not the only auto manufacturer that will do so.

American auto companies have been in China for many years now, and the market has been a good one for them sales wise. After SARS the market for cars skyrocketed and sales projections showed potential never seen before in another market. Added to the dear of contagious disease the ease by which Chinese consumers could access loans, and you had a perfect market where hundreds of new cars were hitting the road daily. As far as anyone concerned from the consumption side of the equation , the only possible thing that was going wrong with the auto market was that the capacity of China’s road was not enough

On the manufacturing side though, things were much different. Volkswagen was one of the first, and the Harvard Business Review has a great case study on their process entitled Shanghai Volkswagen: Facing a New Era(subscriber only) whereby Volkswagen’s development of suppliers is closely documented and how their ability to develop a stable pool of local suppliers allowed for their early success in China.

The problem though was that long term, Volkswagen essentially trained its future competition, and have also trained up the suppliers that will provide the parts used in competitive vehicles (HBRs follow up to the above is entitled Shanghai Volkswagen: Time for a Radical Shift of Gears).

While speaking with a Big 4 consultant working with one of the foreign auto makers, the picture painted was even more interesting. In his eyes, the problem is foreign auto makers have opened a Pandora’s box as they have created a situation where they have not only created their future competitors, but they are also reliant upon them for parts.

Take SAIC for example (JV partner to VW and GM). In its numerous plants, axels, door frames, and a host of parts are produced that end up in GM and VW cars. The partnerships are ones that have provided stable sourcing platforms for both companies, but now that SAIC wants to produce its own car these companies are going to have a hard time stopping them. After all, many if their suppliers are partially owned by SAIC.

If the need for American suppliers to support their OEMs in China isn’t enough reason to move to China, then the they need to support them in their home market will be.

With the lower production costs of units in China, foreign auto makers are now looking to export vehicles from the mainland to the heartland. For many 3rd tier suppliers, this will create a situation where they must either support the importer (read domestic auto manufacturer imported products from China into their home market), or face being replaced by local suppliers. Ironically, it is China’s own policy of only Chinese branded cars being allowed to access to export rights that is saving these suppliers. but, that is sure to change as Chinese autos begin making their way to the U.S. market.

As highlighted in articles by Business week, China Daily, and NPR and reports by PWC, U.S. Foreign Ag Service, EYI, Chinese auto makers will soon be entering those markets.

Wrap-up:

What is particularly concerning to me is the speed by which change can occur in China and that many executives that I speak to are unaware of many of the various moving pieces working against them in China. In essence they have wrapped themselves in the warm blanket of denial by not seeing the warning signs coming, nor reacting in the correct manner.

The Detroit auto show saw the first Chinese manufactured car on the floor. Advertised as far from being ready to enter the market, a collective gasp at how far the Chinese had come did occur. this year, several more cars will make their debut.

For 2nd and 3rd tier suppliers, the time to formulate a China strategy (if they have not already) is now. With transportation costs being the only barrier to entry we have had in our programs, once completed cars are being exported from China to the U.S., the costs of freight become mute and then U.S. 2nd and 3rd tier suppliers are really in trouble.

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4 Responses to “There Will Be No More 3rd Tier Suppliers in America!”

  1. China Law Blog says:

    November 9th, 2006 at 9:14 am

    Auto Industry Moving To China, But What About Trucks?…

    The All Roads Lead to China Blog just did very interesting and in depth post on the auto industry moving to China, entitled, There Will Be No More 3rd Tier Suppliers in America! In summary, it says the following: Automobiles…

  2. Auto-Crozon says:

    September 15th, 2008 at 4:01 pm

    I think the Chinese Auto Industry is already set for a takeover of the North American markets – look at this article I found – http://www.monsterauto.ca/chinese-cars.php

  3. Flug says:

    December 16th, 2008 at 1:51 am

    I think China is “eating” everything, not only the Auto Industry. They are able to produce all what they want and even in these times of crisis their problems are not so huge like the problems in USA and the rest of the world, for example.
    In many cases their low productions costs don’t enable the others worldwide producers to compete. That´s why is very easy to put the eyes in that paradise for the manufacturing.

  4. Rich says:

    December 16th, 2008 at 5:44 am

    Flug.

    There is a reason why Wal-Mart is able to offer everyday low prices.

    However – I should say that the layoffs in China are growing, and are already at a gross level much higher than the US. It is a numbers game.

    R