How China's auto parts industry survives in the cracks in 2009

If we want to compare the happiness index of 2008 of all links in the automotive industry chain, auto parts companies are likely to be the lowest.

In the first half of 2008, auto parts companies were suffering from rising prices of raw materials and rising labor costs. In the second half of the year, it was hard to see the trend of falling raw material prices. The domino effect caused by the international financial crisis also made the domestic and foreign auto markets enter the cold winter. Vehicle manufacturers have drastically cut production, and the shrinking market demand has caused the parts and components companies to suffer further blows. .

Between the ups and downs, there is hardly any room for auto parts companies to breathe. Although backbone enterprises with high technological content and strong capabilities have been affected, sales and profits have been affected, but there are still cold houses in the auto market. Those companies without expertise, relying mainly on scale and small profits, and companies that have been aggressively expanding in the past two years are faced with life and death.

In the first half of 2008, international crude oil prices soared to US$147/barrel and iron ore prices also rose by 65%. The increase in the prices of these two raw materials has made auto parts companies, such as plastic parts, steel plates and glass, face the auto market that was still booming, but it is not easy.

Since spare parts purchases account for an average of 70%-80% of the entire vehicle, the profit loss caused by the auto market price war is actually mostly shared by upstream component suppliers. The part companies sandwiched between the price rises of upstream companies and the price cuts of downstream companies are naturally miserable, even if the profitability of leading companies is also greatly squeezed.

The results of the first quarter of 2008 of Fuyao Glass, a major supplier of automotive glass, show that the gross profit margins of its main business float glass and automotive glass are both declining, and its gross profit margin has dropped from 37.69% in mid-2007 to 2008. 32.95% in the first quarter.

Large enterprises have the scale and strength to support, or through the adjustment of product structure, elimination of low-profit products to deal with, some small and medium-sized parts and components companies have low profits, in front of vehicle companies and there is no bargaining power, can only choose to switch or close down.

In the second half of 2008, the prices of raw materials fell, and some vehicle manufacturers raised the prices of their products. However, not waiting for the auto parts companies that have been difficult for the first half of the year to take a breather, the impact caused by the financial crisis ensued.

Unlike vehicle companies, the export of domestic parts and components companies is mainly concentrated in developed countries. The United States, Japan, South Korea, and the European Union are the key regions for the export of auto parts, and they have also become a “stricken area” during the financial crisis.

In the relevant report, Wang Jinzhi, an auto analyst at China International Capital Group, stated that from January to October 2008, the three major developed markets in North America, Europe, and Japan accounted for about 65% of China’s auto export volume. However, as the financial turmoil spread and gradually evolved into an economic crisis, the growth rate of Chinese parts and components exports also slowed down significantly. In October 2008, China's parts exports to North America and Europe decreased from 24.8% and 55.1% in 2007 to -2.0% and 29.1%, respectively. Affected by this, the export growth rate of the parts and components industry declined from 37.9% in 2007 to 14.8% in October 2008, showing a significant downward trend.

Compared with the shrinking market demand caused by the financial crisis, Geoff Auto's CEO Chen Wenkai believes that the impact of the financial crisis on exchange rate fluctuations will have greater impact on auto parts exports. “The euro, the ruble and the Australian dollar depreciated sharply in the second half of 2008, and some were as high as more than 30%, which caused great losses to domestic parts exporters that signed orders. Due to currency depreciation, the purchasing power of these countries fell, and subsequent orders decreased. ”

The situation in the domestic market is also not good. It is no longer secretive to suspend production, cut off work, lay people down in vehicle companies, and it is impossible for upstream parts and components companies to have any orders. Chen Wenkai introduced that the current utilization rate of domestic parts and components companies is very low. “In some commercial vehicle parts and components companies, the utilization rate of the production line is only 10%-20%, and the car industry is only about 40%-50%.”

Chen Wenkai said that the sub-sectors such as stamping and foundry are in short supply in the past few years, and the expansion of enterprises is more severe and the impact will be even greater.

For this year's market, Chen Wenkai is not optimistic. “In the first half of 2009, the auto parts industry will be even worse, and the impact of the international financial crisis on the real economy has not fully emerged. It is uncertain how the exchange rate changes now.”

Bao Lingge, general manager of Bakken Business Consulting Asia Pacific, said that compared with its foreign counterparts, Chinese auto parts suppliers are particularly at risk of reshuffling. In the Chinese automotive industry, 100 auto parts suppliers can only provide less than 50% of auto parts. In Europe and the United States, 20 parts suppliers can provide about 80% of auto parts.

The idea that it is tempting to whip out overseas is a far-fetched opportunity for most auto parts companies in China.

“Currently a more feasible approach is to dig talents overseas and purchase advanced equipment to upgrade technology and manufacturing processes. It is still difficult to acquire assets and enterprises.” A number of parts and components companies responded very similarly.

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