Chinese Car Exports: A Non-Starter?

For the past years, auto makers in Europe and the U.S. looked to China with hope, and with trepidation. They hoped the booming Chinese market would lift their worldwide sales. It did. They feared the Chinese would export cars en masse, swamping Europe and the U.S. with cheap vehicles. They did not. China didn't ruin Western markets. Western banks and brokerages did.

Weapons of mass destruction.



Nevertheless, red alert was sounded each time a Chinese car appeared at an auto show in Frankfurt, Geneva, Paris, or Detroit. Weapons of mass destruction were deployed to ward off a Chinese invasion: Chinese cars were crashed, and grisly results were published, sometimes coincidentally timed adjacent to those auto shows. An insider close to the matter said: “If you have a lot of money, you can crash a lot of cars. There’s always one crash that looks real horrible. That’s the one you will see on YouTube.”

What you see here is the infamous Landwind test by the German AUTO Club ADAC. The test was rumored to have been under the influence of German auto makers, and that the impact was at a higher speed than necessary. A later test by TÜV confirmed that the Landwind met all mandatory safety criteria according to ECE R94. But the damage was done, sales of the Landwind remained in the doldrums.

This time, the markets crashed.

This year, also quite coincidentally, there were no terrifying crashes of Chinese cars before the Paris Auto Show. Likewise coincidentally, Edmund’s AutoObserver reported from the show: “The era of Chinese car exports may have ended before it even began.”

Only two Chinese auto companies showed up for the show. One was Brilliance, BMW’s joint venture partner in China. The other was the French distributor of Shuanghuan Automobile. Neither garnered a lot of attention.

This time, no cars needed to be crashed. What did crash, were the auto markets. Auto sales in the U.S. were down 26 percent in September. In Japan, car sales are at their lowest level in more than thirty years. European markets are faring poorly.

Chinese new car exports drop.

This was immediately felt in Chinese new car export numbers. August witnessed the first monthly decline over recent years in China's car exports, due largely to shrinking demand overseas. According to the China Association of Automobile Manufacturers (CAAM), China sold abroad 44,400 motor vehicles in August 2008, down 22.18 % from the previous month, or 11.29 % from a year earlier. Analysts see this trend to accelerate as the full impact of the market crash is being felt, and as the cars in the pipeline from China remain unsold.

In 2007, China had exported a total of 612,700 vehicles, up 78.95 % from a year earlier. For the first eight months, the total Chinese auto export value rose 36.5 percent year-on-year. Experts expect a decline for the rest of the year.

Parts fare better.

For auto parts, the picture is not as grim at all. Sure, according to Gasgoo, Chinese parts makers who focused on foreign new car manufacturers, saw their sales “drop significantly this year.”
Manufacturers who target the after-sales market fare much better “with many people preferring to maintain cars rather than buying new ones.” The semi-official newspaper China Daily said: “the US and the European customers' preference for China-made auto parts, which are more competitive in price, provide much better opportunities.”

China’s auto parts export recession-proof, rises 34.9%.

What slowdown? Parts power ahead. By Bertel Schmitt, CEO Sinamotive Group (HK) Limited.

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.
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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.