Auto-parts Makers in Taiwan Look For Calm Amid Global Storm

The global auto industry seems to be running out of gas as the flagging economy keeps buyers off the dealer lots. The woes of the Big Three have been grabbing most of the headlines in recent months, but Japan's leaner automakers, and legions of parts suppliers, are also feeling the pain this time around. No one knows for sure when the auto market will recover, and the outlook for auto parts suppliers is equally opaque.

All of this spells new challenges for Taiwan's auto part makers, but it also offers new opportunities as well. Taiwan provides a major share of the world's high quality, reasonably priced aftermarket (AM) auto parts, accounting for over 80% of the collision replacement parts market in the U.S. With a small local auto market (about 250,000 units a year) and Japanese car brands in the driver's seat, local auto parts makers have been looking for growth beyond Taiwan's borders. In addition to the AM market, they are muscling up in the more lucrative original equipment (OE) segment, seeking a stronger foothold in the international supply chains of auto brands.

For Taiwan's auto parts makers, the silver lining in the global economic meltdown could be a redoubled effort by automakers to cut costs, a trend that Taiwan's low-cost, high-quality suppliers are well poised to capitalize on.

The outlook seems especially promising in the OE segment. Only about 20% of the locally made auto parts are destined for the OE market, but that ratio has been growing in recent years as producers improve quality and keep prices competitive, qualities that have endeared made-in-Taiwan parts among cost-cutting automakers and tier-one parts suppliers in Europe and the U.S.

One such company is Magna International Inc. The world's fourth-largest auto-parts supplier, Magna has established two R&D centers in Taiwan and is bullish about the local industry's prospects. "Taiwan has several advantages in the auto-parts industry, including rapid prototyping, solid industrial infrastructure, and advanced production techniques," says Frank O'Brien, executive vice president of Magna's Asia-Pacific operations

Positive Signs in OEM Biz

Already the world's No. 1 supplier of AM auto-parts, Taiwan is expected to further bolster its market share in this segment as Europe opens its replacement-parts market. Local producers are also winning a growing share of outsourcing orders from big international automakers and tier-one parts suppliers in the U.S. and Europe.

Tapping into the supply chains of automakers and tier-one parts suppliers is not an easy task since automakers and major parts suppliers are often closely joined at the hip. But automakers' supply chains break down, Taiwanese producers are expected to win a growing share of OE orders. This would also open a new door for local makers to expand beyond the saturated domestic market.

Parts suppliers in Taiwan are already increasing OE part exports, especially to the overseas plants of Japanese automakers, mainly in the ASEAN area and mainland China.

New Industry Terrain

Intense competition from Japanese auto brands has been a major factor driving U.S. automakers or tier-one parts makers in the U.S. and Europe to outsource from Taiwan parts suppliers. The trend has accelerated along with the global downturn as cost cutting becomes the mantra for survival.

Japanese auto brands have been eating away market shares from the major European and American auto players, in both regional and global markets. This has seriously endangered the survival of tier-one parts suppliers in the said two regions, as the frequent Chapter-11 news from the segment confirms. For Taiwanese parts suppliers, the fallout has opened new doors to the previously closed OE market, providing an access to the global automakers' supply chains and long-term supply partnerships.

Among the tier-ones that now outsource products from Taiwan or cooperate with local partners to cut costs include many of the industries biggest names, such as Visteon, Dana, Delphi, and Magna.

After a period of joint product development and mutual adaptation, qualified local partners are shipping increasing volumes of parts to global carmakers and tier-one customers. Among those seeing sales gains from OE-parts shipments are TYC Brothers Industrial Co., Ltd., Fine Blanking & Tool Co., Ltd. (FBT), Hota Industrial Manufacturing Co., Ltd., Chian Hsing Forging Industrial Co., Ltd., Macauto Industrial Co., Ltd., Tung Thih Enterprise Co., Ltd. (TTE), and China Metal Products Co., Ltd.

Hota is now a tier-two supplier of transmission systems for GM tier-ones ZF and Borg Warner. And Chian Hsing has drawn on its cost edge and advanced forging techniques to win big orders for forged parts from Dana and Delphi.

TTE, which supplies OEM automotive-electronic parts to many local automakers, aims to become the world's largest supplier of parking sensors in 2009 with an annual shipment volume of at least 15 million units. The company has outpaced many big-name rivals such as Valeo and Bosche with its patented ultrasonic-sensor techniques and superior cost-control ability. The Taiwan company has been selected by Ford, GM, DaimlerChrysler, and Nissan as the major OE supplier of parking sensors for many major car and light truck brands. TTE also has been developing newer and better automotive-electronic safety and comfort sub-systems for automakers worldwide.

Another winner in the new auto parts ecosystem is Tong Yang Industrial Co., Ltd., the world's largest maker of AM plastic body parts. The Tong Yang Group (TYG) began aggressive deployment in China's OE auto-parts market over 10 years ago and now the conglomerate runs 18 subsidiaries and joint ventures in China focusing on OE parts production for major local automakers.

Macauto is an OE supplier of sunroofs, sunshades, and air-conditioner airflow controllers to about 20 global automakers, including Mercedes-Benz, BMW, Peugeot, Fiat, and GM. The company also supplies AM air filters. Currently, the company runs three facilities worldwide, including one in Taiwan, one in the U.S., and another in mainland China. A flexible system of labor division among the three facilities has further strengthened the company's global competitiveness.

These examples only begin to hint at the strong potential of Taiwan's parts industry, which is expected to further exert its competitive advantage amid the financial storms to win orders for high-quality, price-competitive parts.

Price & Quality

When it comes to keeping prices low and quality high, OE parts suppliers in Taiwan are a few gears ahead of rivals in other places.

Supported by a comprehensive and highly efficient central-satellite plant system, local auto parts suppliers have a high level of production flexibility, broad product range, low production costs, and fast development time. This system also enables individual suppliers to specialize in their respective fields.

Another advantage of local auto parts makers is their division-of-labor manufacturing networks in Taiwan, mainland China, and other nations. With plants on both sides of the Taiwan Strait, producers can meet a range of customer needs in terms of pricing, quality, quantity, and lead times.

Third, auto parts makers in Taiwan specialize in a small-batch, large-variety production, enabling high-efficiency, flexibility, better management and cost-control, which makes Taiwan one of the best suppliers for AM and OE parts.

Auto Electronics

Taiwan auto parts producers are also pulling ahead on the innovation front, supplying advanced automotive-electronic systems and components to global customers at reasonable price levels.

Taiwan has long been a force in the ICT sector, and this strength has helped the island power ahead in the automotive electronics market. This market is growing as automakers seek to improve the energy efficiency, comfort and safety of their products with "intelligent automobiles."

The Hua-chuang Automobile Information Technical Center Co. Ltd. (HAITEC), a company under Yulon, Taiwan's largest automaker, is playing a leading role in the development of the local automotive electronics sector. With support from the government and domestic research institutes, HAITEC has developed several car models packed with advanced electronic systems.

The first car models developed by HAITEC, a 2,200cc sport utility vehicle (SUV) with a fully homegrown powertrain system, will be commercialized in 2009 in Taiwan and mainland China initially. The sales outlook for the new SUV, which will be marketed globally under the Luxgen brand, is unclear in the current economic climate, but the vehicle will at least provide a good platform for showcasing the capability of local auto parts suppliers, paving the way for increased sales to global automakers and tier-one parts makers. The new vehicle will also provide on-road verification of Taiwan-made electronic parts to further convince global buyers.

Many of local companies have made significant headway in the in automotive-electronic market, both in the OE and AM segments. Among the world-class products supplied in this market are tire pressure monitoring systems (TPMS), telematics on-board units (OBUs), charge-coupled device (CCD)/complementary metal-oxide semiconductor (CMOS) cameras, thin film transistor-liquid crystal displays (TFT-LCDs), engine control units (ECUs), AC/DC converters, light-emitting diode (LED) lamps, and portable navigation devices (PNDs).