More big kids on the playground

Jan. 1, 2020
News reports emerging from Asia these days mostly originate in China — particularly bad news dealing with toxic toys, wicked wheat gluten and inferior tires. But the country's automotive industry still stands strong, and there are a wealth of A

Globalization of the auto industry still is focused on the East, but it's not just China that's dominating the automotive scene.

News reports emerging from Asia these days mostly originate in China — particularly bad news dealing with toxic toys, wicked wheat gluten and inferior tires. But the country's automotive industry still stands strong, and there are a wealth of Asian countries with a combined massive influence in the worldwide auto parts trade, forming an automotive "Eastern Bloc" that comprises many up-and-comers alongside the more established markets. Asia owns more than 40 percent of the global economic market share. But intra-eastern trading partnerships also are being discussed, which could align military, political and economic interests, creating alliances more powerful than any we've ever seen.

These "kids" from the East now are towering over us on the world's playground, and their future plans may or may not include us.

Our journey through Asia predictably begins in China, which at this time still finds itself the center of attention, surrounded by good and bad news. While continuing domination of Asia's automotive industry, the country is facing an uphill PR battle from the many toy lines that recently were found to be coated with toxic paint, not to mention tainted food and faulty tires emerging from this capitalist-communist powerhouse. Chinese consumers have faced these product quality problems for some time, but because these issues now affect international consumers, the rules are a little different.

It's interesting to note that, "Chinese consumers have suffered for years from poorly made or unsafe products, with very little recourse to (bring about) change," says Marshall Meyer, a Wharton University of Pennsylvania management professor and China expert, who was quoted in a recent Wharton report. "Now, the international trading community may be able to do for Chinese consumers what their own legal system can't."

He suggests that companies sourcing from China should intimately know every link in the production chain, which means "putting your own people on the ground."

And that advice pertains to any country in which you decide to launch partnerships: Do your homework and be sure that as a distributor, you have the backing of the company that makes the products you sell.

"You have to know what you're buying today and what you're buying two weeks from now," recommends Frank Ordoñez, president of Delphi Product & Service Solutions. Speaking from a manufacturer's standpoint, a constant eye on product quality is absolutely necessary, he adds. "Your quality system has to be robust enough that you are checking it constantly."

All of Delphi's global products are held to the same quality standards, he says.

There are some companies, such as Eastek International, that are U.S. based but offer contract manufacturing services in other countries, so domestic manufacturers and suppliers can get the best of both worlds: low-cost country prices with the backing of a U.S.-based liaison.

Dan Backus, owner of JS Auto Supply in Jamestown, N.Y., says he's seen no recent effects on the Chinese parts that travel through his store. In fact, "I sell a palette of (Chinese) rotors a day," he states.

And he sees Chinese influence on his parts mix only growing with time.

Considering himself a "traditional jobber," Backus carries a number of prominent U.S. premium brands, but even some of these reputable names are sourcing offshore. Besides the fast-moving Chinese rotors, a widespread trend in the brake category, and other items like inexpensive belts, Backus' SKU count is about 80 percent traditional. "I'm still very traditional — more than some people."

But, he adds, this is likely an anomaly, triggered by the big box retail competition in the area that can't lock in to sales with tech customers like JS Auto Supply can.

Kevin Chen, CEO of Gasgoo.com, a business-to-business sourcing portal and subsidiary of Chinese auto-making giant Chery, sees no significant influence of other industries' problems on the automotive industry. "For (China's) exporting products, those foreign-owned companies and joint ventures with international brands also participate in the export market with greater market shares, which has led to the improvement of average quality level among China's products," says Chen.

China will remain an economic powerhouse despite any snafus in product quality and reputation that other industries bring to the table. China's gross domestic product (GDP) was $2.5 trillion in 2006, according to the Automotive Aftermarket Suppliers Association (AASA), which adds that annual GDP growth accelerated rapidly between 2001 and 2005, and merchandise trade rose to 64 percent of GDP in 2005, compared with 39 percent in 2001. Foreign direct investment reached $79 billion in 2005, a 79 percent increase since 2001.

The production capacity of auto parts in China has increased from $46 billion in 2003 to $88 billion last year, adds Chen, who states the country's auto parts exports reached $20 billion in 2006.

Though the country has an abundance of workers, willing to assemble auto parts for a fraction of the cost of other countries, some companies cite a lack of skilled workers as a problem in China.

One of those is Shao Changan, export manager and engineer for Shenyang Jinyuan Herli Automotive, which makes such products as radiators, brake drums, A/C condensers, fuel sending units and ignition coils.

India: another big player

India's still considered a nascent force in the automotive industry, but the country has achieved impressive growth in the automotive sector, at an annual pace of more than 15 percent, according to a study compiled by IBM Global Business Solutions and the University of Michigan's Transportation Research Institute (UMTRI).

It's predicted that by 2050, India, which currently is Asia's third largest economy, will have the third largest economy in the entire world.

Along with anticipating a doubling or tripling of "four-wheel vehicle" sales in India over the next decade, vehicle and automotive component exports are expected to increase 20 and 30 percent, respectively, during this same period, the UMTRI study predicts. Proficiency in English (India has the world's second-largest English-speaking population), low-cost manufacturing and adequate intellectual property protection will help boost this country's export status, while a lack of a skilled labor pool (like engineers), wage growth and an inflexible and over-protective labor system could prove to be a hindrance to the country's success in exports.

India's GDP has consistently grown 7 percent a year, with a 2006 GDP of approximately $804 billion, according to AASA. As of now, two-wheel vehicles represent 75 percent of India's new vehicle sales, but more of these two-wheeler drivers are expected to migrate to four-wheel conveyances, the UMTRI study adds.

An interesting aspect of this transition will be reflected in the trend of the Indian consumer to keep his or her vehicle throughout most of the car's lifespan, unlike drivers in other countries. This dynamic means that India lacks a sizable population of newer-model used cars for those drivers who want to make the transition from two-wheelers to four-wheelers, the study continues. They'll all pretty much be forced to buy new vehicles.

India's passenger vehicle exports grew by 29 percent to 166,413 units in 2004 and 2005, according to the Society of Indian Automobile Manufacturers (SIAM).

The amount of parts India exported to the United States last year increased 25 percent to $578 million, states AASA.

The house of the rising aftermarket

China might be all the buzz, but Japan was responsible for more than twice the number of auto parts imports last year.

The United States imported about $7 billion in auto parts from China in 2006, while we imported $15.4 billion from Japan that same year. But the fact remains that auto parts exports from Japan to the United States dropped last year, and a stronger yen could be to blame. Heavier Japanese currency could make purchases from the country less appealing to the U.S. business world's ailing dollar.

One jobber tells us a majority of one of his supplier's premium bearings and seals are made in Japan and carry the vaunted QS 9000 rating. Even Chinese manufacturers we spoke with say Japan is the most influential Asian country when it comes to trade and manufacturing.

The country had a recent setback in much of its industrial production in July when a 6.8 magnitude earthquake on its west coast virtually halted production of auto parts and automobiles. The earthquake was responsible for at least 10 deaths and damage to major utilities and nuclear power stations.

One company, piston ring supplier RIKEN Corp., was forced to temporarily shut down, which brought production to a halt. Because of RIKEN's high market share, automakers also shut down production. The shutdown amplified the flaws in widespread adoption of a "just-in-time" parts system among Japanese automakers. Just-in-time systems deliver the exact amount of parts needed with no surplus inventory, and, according to media reports, there was no surplus of piston rings and no alternative supplier immediately after the earthquake struck.

As of press time, however, industrial output was expected to increase 7 percent in August, kick starting the country's automobile and auto parts sectors, among other industries like electronics, news reports state.

Japan and China might be business partners, but long held cultural fissures prevent the two countries from fully seeing eye-to-eye. Japan has reportedly been meeting with India to enhance the two countries' nuclear partnerships, with a potentially stronger India-Japan relationship expected in years to come.

A recent Asia Times report points out that economic engagement between India and Japan is set to grow in the coming years, with the two countries aiming to triple bilateral trade from $6.5 billion last year to $20 billion by 2010.

One-third of the approximately 475 Japanese companies in India were set up after Japanese Prime Minister Shinzo Abe took charge in Japan, according to the Asia Times report.

Another example of this growing Japanese-Indian partnership is the recent news of Japanese auto component maker JTEKT Corp. setting up an auto parts plant in India with the Sona Group, which will focus on electronic power steering parts. Each partner will hold a 50 percent stake, according to media reports.

Japan recently struck an economic partnership with Indonesia, as well, in another example of an "intra-Asia" power-building move. The bilateral pact, signed by Abe and Indonesian President Susilo Bambang Yudhoyono, will allow Indonesia to make cuts to approximately 93 percent of its 11,163 tariffs, with 58 percent to be eliminated right away, according to The Wall Street Journal online, which adds Japan will reduce more than 90 percent of its 9,275 tariffs, with 80 percent to be cut immediately. The automotive industry is among those that should see the biggest boost, The WSJ adds.

Taiwan, Korea and other players

Some of the smaller Asian business areas like Taiwan, Singapore and the Philippines might not be as well regarded as China and Japan, but they do have clout with U.S. distributors.

Imports from Thailand have increased 35 percent, more than the increases in imports from China and India, according to AASA.

There also were increases in imports from Korea (38 percent), Indonesia, the Philippines and Taiwan, while imports from Malaysia, Singapore and Japan have decreased, states AASA.

Another boost to these smaller Asian countries is the ASEAN Free Trade Area (AFTA), expected to drive growth throughout Asia and the rest of the world through tariff reductions, price discounts and common product certification standards, among other incentives.

However, there still is a stigma attached to the quality of these parts, especially those coming from Taiwan. One jobber we spoke with recalls throwing away his Taiwan-sourced inventory when he first took over the store as one of the first orders of business.

But when all is said and done, imports from Taiwan were $2 billion last year, a 4 percent increase from the previous years, so the country's auto parts production is gaining traction in spite of personal biases.

In South Korea, about 900 smaller auto parts makers dominate the scene, many of them tied to their domestic automakers such as Kia and Hyundai.

"Korea has a reputation for a very strong manufacturing base," says Delphi's Ordoñez, who adds that, conversely, the country has an undeveloped aftermarket that the OEMs lead.

"The Korean OEMs control not only their OE products, but the OE service all the way down the aftermarket (channels)," says Dominic Seto, managing director of Delphi Product & Service Solutions Asia.

South Korea struggles with a lack of advanced technology and challenges from foreign rivals eager to take over ailing domestic companies, The Korea Times reports.

"Investment in research and development activities compared with sales is also showing a wide gap with that of the U.S. and Japan, which leads to a vicious cycle of having the local auto parts company more dependent on local automakers," states the report. But Hyundai Mobis is emerging as South Korea's preeminent auto parts company and taking a prominent place on the global stage, the country's slowly growing domestic climate notwithstanding.

The bottom line: whatever country's involved, there better be plenty of sand to kick around on that playground in upcoming years.