Chinese Auto-parts Makers See Pain and Promise in Global Downturn

China's auto parts exports managed to maintain a high year-on-year (YoY) growth of 31.3% during the first three quarters of 2008, but they are not immune to the impact of the global financial crisis and the resulting drop in market demand which has prompted almost all the world's big automakers to cut production.

Exports totaled US$1.561 billion in October 2008, representing a slowdown in YoY growth to 17.49% and a decline from the previous month of 9.02%. Customs statistics show that signs of slowdown actually began to appear in September, when YoY growth dropped to 18% and the increase in shipments to the United States, the largest importer of China-made auto parts, plummeted to only 1.6%.

That anemic growth rate actually looks pretty good compared with the 26% drop in auto sales in the American market in October, the biggest contraction in 50 years. In mid-December, Detroit's Big Three (General Motors, Ford, and Chrysler) announced that they would suspend operations for a month at a total of 59 factories in North America. General Motor said that it would extend the suspension of operations at its 20 factories to the end of the first quarter of 2009 as part of its plan to reduce production by 30%, or around 250,000 units, this year.

Everybody is concerned about the fate of the Big Three, given their historic position of overwhelming influence in the world auto market. But the rest of the world is suffering too. The global auto market is considered as being in the worst situation in decades; almost all major automakers in Europe and Japan have announced 2009 production cuts, the inevitable result of which will be a decline in demand for auto parts.

Relatively Stable

The decline will surely extend to China, whose auto parts exports are expected to slow down in the months to come. But the outlook in China is not so bad as in the U.S. First, industry observers note, exports take only a small 10-15% of China-made auto parts, of which 40% are turned out by the satellite factories as OEM parts and the other 60% are destined for the domestic and overseas aftermarkets. This means that 80-90% of all the auto parts that are made in China, stay in China.

Demand will likely shrink at home too, though, and China's domestic auto-parts market is expected to take one or two years to regain the level at the beginning of 2008 (following a record 2007, when production value hit a historic high of more than 400 billion renminbi (RMB). Nevertheless, the global market downturn is not necessarily bad for China's auto-parts producers, which can grasp the hard times as an opportunity to expand overseas market share by using their price advantage and the fact that many parts suppliers all over the world are being forced to shut down.

A survey of the auto industry, conducted by Gasgoo.com, found that 10% of the companies contacted plan to carry on with their corporate expansion strategies (encompassing marketing and sales promotion as well as capacity expansion) in the hope that sales will grow again when the market recovers.

Reactive measures

The Chinese government is trying to spur the advent of that happy event. To help reduce the cost of materials, the authorities announced on Dec. 18 that they would cut tariffs on 670 industrial materials and key components in such categories as textiles, steel, and chemicals, effective from Jan. 1, 2009. The authorities also promised to provide the most favorable tariff rates for industrial materials and parts from the 10 ASEAN countries as well as Chile, Pakistan, New Zealand, Korea, India, Sri Lanka, and Bangladesh. This slashes the average tariff on imported goods from 15.3% to 9.8%.

"With the auto industry in its worst state in years," urged Yang Dong, secretary general of China Association of Automobile Manufacturers (CAAM), "the government should think about how to help through policy adjustments." During a meeting with industry representatives last November, the CAAM proposed six government measures to help boost the auto-parts industry: the provision of preferential tax rates, expanded support of financial institutions, stimulation of exports, increased government's procurement of China-made automobiles, offering of preferential auto loans to consumers, and encouragement of the replacement of old cars.

Some people might suggest that the Chinese yuan (RMB) be allowed to depreciate as a means of helping to boost exports, but no large drop in the currency's value is expected. In fact the RMB gained 6-7% against the U.S. dollar during 2008, a growth second only to that of the Japanese yen. The decision to keep the RMB stable reflects the Chinese government's desire to balance the development of the export and domestic markets.

In its latest report, published in late November, the International Monetary Fund (IMF) predicted that China's GDP would grow by 8.5% in 2009, compared to an average growth of 4.9% for Asia as a whole, 0.7% for the U.S., and a negative 0.7% for Europe. That figure, at least, bodes well for the country's auto-parts industry.