Industry in China Becoming More Complex
Affected by rising costs of labor and raw materials in advanced countries, global automotive makers are forced to look for new locations for investments. With the Chinese automotive market continuing to grow steadily, China has become a compelling target for international automotive brands. Driven by increasing domestic demand for vehicles, and preferential policies by the government to stimulate the domestic automotive industry, Chinese automotive makers have gained significant market share in China.
Looking at the overall structure of China's automotive industry, there are mainly three types of systems, including US/European, Japan/Korean and domestic Chinese makers. In the automotive industry, which has low levels of product standardization and is a relatively closed system, the investment deployment of the major automotive systems differ in terms of geographical locations, procurement characteristics, openness and technology sources. These are important reference points for automotive electronics companies who want to enter the before-market, and these factors will have an impact on suppliers' strategies in terms of facility locations, product positioning, human resources etc.
The vast majority of foreign companies took the joint venture route to tap the Chinese market. Joint ventures in the Chinese automotive industry were mainly classified in three groups: European and US makers, Japanese and Korean makers, and Chinese makers. Before automotive electronics suppliers enter the supply chain and decide on a production site and product positioning, they should take into consideration the differences of these three groups of automotive makers in terms of geographical locations, purchase policies, and technology resources.
Industry Reshuffle Stirs Industry Equilibrium
According to China's Eleventh Five-Year Plan for the automotive industry, there will a small number of automotive makers with economies of scale by 2010. Currently, there are not yet companies with annual production capacities of more than two million, and only a small number of companies with annual production capacities of more than one million. With the automotive market in China growing rapidly, gradually expanding capacity is not sufficient anymore. Instead, mergers and acquisitions and joint ventures are the quickest methods to reach production growth targets. International makers have also adjusted their strategies in China. Since 2007, auto makers have been initiating a large number of mergers and acquisitions, which were expected to significantly affect existing partnerships between these makers and their second- and third-tier component suppliers.
Owing to differences in corporate culture, management systems, development processes, and decision-making strategies, the integration of different automotive systems requires at least three to five years. Therefore, it is anticipated that the mergers and acquisitions of whole vehicle companies in the industry will not cause a sharp reduction in the number of component suppliers in short-term future. Nevertheless, automotive electronics companies should still take some measures to reduce the impact stemming from mergers and acquisitions.
For example, component suppliers may take the following points into consideration: whether or not procurement strategies will change because of mergers, leading to threats in terms of collaboration opportunities or orders; whether or not they can provide timely component supply for new models developed by automotive makers after mergers or acquisitions; whether or not they can provide sufficient capacity for production expansion after mergers and acquisitions; whether or not they can meet the requirements set by automotive makers or first-tier automotive component suppliers in terms of production costs and quality. After the mergers and acquisitions, the Chinese automotive industry will be reshuffled and thus automotive electronics suppliers should pay close attention to client relationships.
Potential Opportunities in Commercial Vehicle Electronics
Automotive electronics suppliers usually face relatively high barriers to enter supply chains for passenger cars, in which automotive makers have established strong partnerships with their strategic suppliers. The supply chain of commercial vehicles in China comprises mainly Chinese automotive makers and relationships are not as strong. Consequently, domestic automotive electronics suppliers face relatively low entry barriers to enter the supply chain.
Commercial vehicles' share of total automotive production in China only accounts for around 25-30%, with their share of total automotive electronics value less than that of passenger cars. Automotive electronics products used in commercial vehicles are expected to increase as commercial vehicles are seeing steady growth in Chinese automotive export markets. In addition, an increased focus on safety in public transportation, coupled with the government's mandatory regulations for the installation of automotive electronics products, are likely to boost sales of automotive electronics products.
Compared to a more complicated and competitive supply chain for passenger vehicles, the supply chain for commercial vehicles, which primarily encompasses Chinese domestic automotive manufactures, is more complete. Supply relationships for high-tech automotive electronics products in the commercial vehicle sector have not yet been established, presenting a possible niche market for automotive electronics suppliers.
Generally, manufacturers of commercial vehicles emphasize anti-vibration, anti-heat, and anti-dust features. As a result, automotive electronics suppliers can develop automotive electronics applications tailor-made for commercial vehicles in a bid to seize new business opportunities. Applications also include tire pressure monitoring systems, fleet monitoring, car data recorder, navigation systems, automotive entertainment systems, and automotive electronic control modules.