European suppliers have spent the past 10 years rushing into China, but those that lack high-tech solutions will find it hard to survive
"We face harsh competition from Chinese suppliers. We can cope with that thanks to our technology." – Ali Ordoobadi, Valeo group vice president in China
Another wave of European migration of Tier 2 and Tier 3 suppliers is just beginning.
Most companies say they aim to begin exporting as soon as possible.
“All of the big companies have been here for 20 years,” says Jan Borgonjon, president of InterChina Consulting in Beijing. “They have wanted to protect their traditional markets in Europe, but in five years we will start to see a boom in exports from China.”
Valeo CEO Thierry Morin has said the French supplier will be sourcing 70 percent of its parts from low-cost countries by
2010 and that it wants to source E1 billion a year from China by 2007.
“I think there will be more and more China content in components made in Europe,” says Ali Ordoobadi, Valeo’s group vice president for China.
The French supplier has 10 manufacturing joint ventures in China and employs some 3,000. It produces lighting systems, starters and alternators, wiper systems, security systems, heating, ventilation and air conditioning systems, motors and actuators and clutches.
The company expects its local sales to hit E600 million this year.
Germany’s Robert Bosch has 17 manufacturing ventures here and some already are exporting. For example, its UAES joint venture exports gasoline-engine management systems to automakers in Europe, North America and Japan.
ThyssenKrupp of Germany has six joint ventures in China making everything from crankshafts to steering columns.
Many European suppliers also have opened research and development centers here.
Bosch opened its third r&d center in China in November 2005. The new center will play an important role in Bosch’s global operations by validating materials and components sourced in China for use in Bosch operations worldwide.
“We are not sourcing enough from China. It has to be more, and it has to be faster,” says Hans Hechtel, general manager of Bosch’s Suzhou Engineering Center and general manager of Bosch Automotive Products Suzhou.
Valeo opened an r&d center in China in 2004 to work on advanced lighting products.
Paul Gao, a principal with the consulting firm McKinsey and Associates in Shanghai, says European suppliers have a technical advantage over their US and Chinese competitors in China.
But “many of their products are over-engineered and too expensive for the local market,” he says.
Valeo’s Ordoobadi counters that technology is precisely what gives European suppliers an edge against hard-charging Chinese companies, who largely compete on the basis of lower cost.
“We face harsh competition from Chinese suppliers,” he says. “We can cope with that thanks to our technology.”
For example, Ordoobadi says he sees big potential in China for Valeo’s new camless engine system.
The system replaces the camshaft with a computer-controlled valve system, thus reducing pollution and lowering fuel consumption. Although more expensive up front than a traditional engine treatment, the system can reduce vehicle operating costs over the long term.
As another benefit, says Ordoobadi, the system addresses two hot-button issues being pushed by the government: emissions and fuel consumption.
“We are proposing the same solutions for China as for Europe,” he says.
Mike McKenzie, a senior emerging markets analyst with PricewaterhouseCoopers in Detroit, estimates that China will account for 30 percent of all automotive growth worldwide through 2012.
But he said that growth will come with enormous challenges for suppliers.
They include looming shortages of electrical power, rising raw materials costs, likely wage increases and increased competition from local suppliers.
“As margins thin and price competition intensifies,” he said, “an efficient and low-cost supply base will be essential for financial success.”
Smaller European suppliers – those with sales between E500 million and E2 billion – may find it hard to invest much in r&d here given the poor returns.
But, like the Tier 1 suppliers, they will have little choice but to expand their presence here, says Borgonjon of InterChina Consulting.
“On the one hand, you have to be here, he says. “On the other hand, it is difficult to make money in this market.”