Tuesday, October 14, 2008
Despite the global slowdown, the Chinese auto parts industry powers ahead. In the first seven months of 2008, the value of China's auto-parts exports grew by 34.9% year on year (y/y) to $8.88 billion, China’s customs bureau said. From January to July 2008, China exported $ 8.73 billion worth of auto-parts.
Foreign invested companies and joint ventures exported $4.56 billion auto-parts, up 31.6% y/y, accounting for 51.4% of the total.
The three major destination markets of China-made auto parts are the U.S., EU and Japan. Parts for $2.69 billion (+8.8%) were sold to the U.S.A., parts for $1.6 billion (+39.2%) were sold to the EU, and parts for $1 billion (+36.8%) were shipped to Japan. These three markets contributed 59.6% to the total value of China's Jan-Jul auto-parts export.
This validates my company's previous analyses:
1.) The parts market, especially when targeted at after sales, is recession-proof.
2.) After diminishing growth in the U.S.A., more and more Chinese parts go to Europe.
3.) The main drivers of this growth are foreign companies, who use China as a low cost production base and sell the product under their own brand name at high margins. Bosch China for instance reported that their sales are expected to reach 2.3 billion Euros, which would be a 30% increase over last year. Jay K.Kunkel, President Asia Continental AG, said that the only risk is "not investing in China."
4.) With lower raw material prices and lower shipping costs, we expect further increases, especially in the after sales segment. The OEM segment should also grow, because the world’s auto makers try to off-set their lower sales by purchasing lower cost parts in China.
About the author: After having worked as a Marketing Consultant for Volkswagen AG for three decades, Bertel Schmitt changed sides in 2005 to found Hongkong, Beijing, and Hamburg based Sinamotive, a company specialized in sourcing low cost high quality auto parts in China. The company sells to major wholesalers in Europe.
When times were good, the big automakers looked at China as a threat. When auto sales plummeted in the U.S., and fell in Europe, automakers looked to China to save their bacon. China won't disappoint. But it can't save them all. Sales figures just released by the China Association of Automobile Manufacturers, say that passenger vehicle sales in China fell for a second month in a row in September. They dropped 1.4% from the same period in the prior year to 552,800 vehicles. There are worries about a demand slowdown.
Still a very healthy rise: 11.4%
Still, sales of passenger vehicles in the January-September period increased by a healthy 11.4% to 5.1 million units. 2007 saw a rise of 21.8%. The September decline in passenger-vehicle sales indicates a full-year sales growth in the single digits. The decline came as a surprise, because September is usually a strong sales month in China, when consumers buy cars ahead of the Golden Week holiday.
Volkswagen AG was the hero. After so-so sales in prior years, VW sold 772,783 vehicles in China from January to September. This amounts to a 13% rise compared to the same period in the prior year. Volkswagen's Audi luxury brand contributed most. Volkswagen China plans to sell a million cars in 2008, which would translate to an increase of 9.8% from the 910,491 vehicles in the yedar before. According to VW's Finance Director, Volkswagen plans, for the first time in history, to sell more cars in China than in its home market Germany in 2008.
No saturation in sight.
The shift into lower gears doesn't mean that a saturation of the Chinese auto market would be near. China just started when it comes to cars. In 2007, the total number of vehicles in China was 57 million units. That total also counts 14.68 million three-wheeled vehicles and low-speed vans. As it stands, China's vehicle ownership per thousand populations is below 50. The number is 740 in the United States, and more than 500 in Europe. It will take a long time for China to reach saturation. Total world output is 69 million cars per year. Even if the whole world would produce cars for China only, it would take more than ten years to bring China's market to saturation.
The worst year for new car sales
Since decades, this is the worst year for new car sales, especially in the saturated markets of U.S. and Europe. US new car sales plummeted to a record low in September 2008. For the first time in more than 15 years, monthly U.S. sales fell below 1 million. Traffic in showrooms has come to a virtual standstill. Industry sales crashed by 27% to 964,873 vehicles. Likewise, the European new car market is on track to fall to its lowest level in more than a decade.
In Europe, the drop of new car sales is expected to be less dramatic than in the U.S. Analysts expect Western European volumes to decline 5% in 2008 and 3.5% in 2009. Analysts also expect Western Europe and the US to report approximately 14 million in new cars sold in 2008, with the outlook flat to lower in 2009. Some industry insiders, such as Katsuaki Watanabe, President of the world's largest automaker, Toyota, expect even lower numbers. Watanabe recently said that U.S. new car sales will probably end the year below 14 million.
U.S. industry sales could "collapse" in 2009, J.D. Power & Associates cautioned. Standard & Poor's warned of a possible insolvency of GM and Ford, "because of the rapidly weakening state of most global auto markets" and weak capital market conditions. Ford and GM promptly denied that they might file for bankruptcy. Instead, GM is in merger talks with Chrysler, after ending a flirt with Ford - as they did many times before, without ever consummating the marriage.
Profit from parts.
How can you make a profit with cars in such a dismal environment? Don't sell cars. Sell car parts. People may stop buying new cars. However, people can't stop driving. People simply hold on much longer to their older cars. Cars are having an increasingly longer usable life. Already, the average age of all cars on Germany's streets is 8.4 years. 10% of Germany's cars are over 16 years old. According to a recent study, the car park in Europe will rise from currently approximately 200 million to 275 million in 2025. The study also predicts that the average age of a car on Europe's streets will rise to 10.2 years in 2025. In the new European countries, the average age of the car is expected to rise to 14 years by 2025.
Older cars: A gold mine.
If you are in the business of servicing older cars, you are sitting on a gold mine. Nobody spends more for service and repair than owners of older cars. According to a recent DAT-Veedol Report, the annual average spendings for maintenance and repairs by German owners of cars that are less than two years old are EUR 109. Owners of cars older than 6 years spend close to EUR 500 per year for maintenance and repairs. The Wall Street Journal agrees: "As more consumers hold off on buying new cars, they're making more repairs." As older cars are subjected to wear and tear, expenses for service and repair are much higher than for new cars (which are covered by warranty anyway.)
Owners of older cars may spend more, but they are looking for value. Owners of older cars are price sensitive. The price of the repair bill should relate to the value of the car. The key to unlock this market are high quality, competitively priced parts.
Where to source these high quality, competitively priced parts? Mainly from China. China is the world's biggest exporter of auto parts. Auto manufacturers worldwide have been buying their parts in China for years. Japanese, European, and US automakers source parts used for production in their home markets in China. According to the report, GM buys 20 million parts a month from 190 Chinese suppliers, and had experienced no quality problems over the past year. What's more, most brand-name parts are already manufactured in China.
Now more than ever, sourcing car parts in China makes dollars and cents:
Metal prices, which saw a wild run-up in the first half of 2008, have been coming down since July. In October 2008, Aluminum fell to a 31-month trough on the deteriorating health of the car industry.
Steel prices are also falling. There were reports of panic selling . Forbes quoted an analyst who said that steel prices are "coming down hard and fast" as the economies of the United States and Europe deteriorate and growth slows in China.
Rates for container shipping are falling dramatically. "Barely 12 months ago carriers were making record profits in the Asia-Europe trade but from summer 2008, freight rates have plummeted and appear to still be in decline," said Neil Dekker, editor of the Annual Container Market Review and Forecast 2008/2009 for London-based Drewry Shipping Consultants. The Baltic Dry Index which measures freight rates for shipping has crashed by 82% since May, touching a five-year low. Container vessels are leaving Asian ports with 20% spare capacity. The banking crisis has affected letters of credit, essential instruments for international trade.
China's domestic auto sales will most likely see 2008 growth rates of under 10%, just released figures by the China Association of Automobile Manufacturers say. In the previous years, China had experienced double digit growth rates. The reduced domestic demand for OEM parts is expected to apply additional pricing pressure on parts manufacturers.
Private labels boost revenue.
That's why many repair chains and wholesalers in Europe and the U.S. are gearing up to launch their own private label parts lines, sourced in China. There is a huge profit potential. Many parts can be sourced in China for a fraction of their European and U.S. retail prices. According to Kyu-min Oh, senior industry analyst for the Automotive & Transportation team with the international reserach firm Frost & Sullivan, resellers are heading towards white-box brands to help boost revenue. "Profit margins when selling name-brand items are typically 30 to 40 percent, while the margins made when selling private labels are closer to 70 to 75 percent," the analyst said.
Author Bertel Schmitt is looking back at a 30 year career as a marketing consultant to Volkswagen AG. He is now CEO of Hongkong, Beijing, and Hamburg based Sinamotive, a company specialized in sourcing low cost high quality auto parts in China. The company is backed by U.S. venture capital.