"Dr. Auto" Optimistic About Taiwan's OEM Auto-Parts Biz

Jerry Ou, director general of the Industrial Development and Investment Center (IDIC) under the Ministry of Economic Affairs (MOEA) and official in charge of key investment projects in Taiwan, has been a leading player in the development of Taiwan's automotive industry in recent times, earning him the nickname "Dr. Auto."

Ou has witnessed and made important contributions to the growth of Taiwan's automotive and parts lines from its early years, and now is anticipating one of the industry's most important transformations -- from aftermarket (AM) supplier to a supplier of both AM and original equipment manufacturing (OEM) products.

Great Leap Forward

"Over the past 30 years, Taiwan's AM-dependent auto-parts industry has gained enough momentum to make the leap into a new niche--OEM, " Ou says. "The accumulated strengths, or thresholds, were achieved by both the strenuous efforts of private makers and the government. For example, the Industrial Development Bureau (IDB) introduced regulations requiring all Japanese automakers with cooperation ties with local partners to import a certain annually increasing ratio of Taiwan-made parts to offset their exports to Taiwan. This has also helped local auto-parts makers develop the quality and safety standards required by international auto companies."

Ou notes that the auto-parts line is a capital- and technology-intensive industry requiring expertise in small-batch, large-variety production. Moreover, products have to pass high safety and quality standards. In all of these regards, the auto industry poses unique challenges compared with standardized, large volume production mode, as in the information technology (IT) and electronics lines.

In its bid to move up the global feeding chain in the auto industry, Taiwan has the advantage of decades of AM experience and an increasing tendency among automakers to outsource parts, says Ou. Both factors have opened a window for local makers to break into the OEM segment.

The global automobile market has changed a lot in the past few years. As competition heats up, all automakers have been pushing new models with greater frequency. The combination of more models and the unique specifications, quality systems, and technical platforms of each automaker, mean strong demand for a large variety of parts in small quantities: a business model, Ou notes, that is Taiwan's particular specialty.

Ou says that small batch production has the added benefit of generating the kind of high margins that Taiwan auto parts suppliers need to stay competitive against the big players in Japan, Europe and the U.S. Taiwan suppliers also have maintained a quality edge over their rivals in Southeast Asia and mainland China.

Small-batch, large-variety production also grants a high degree of flexibility and unmatched cost competitiveness in adapting to the OEM business mode. Over time, local manufacturers can expand their production capacity and set up long-term cooperation ties with international automakers and tier-one parts suppliers.

The so-called small-batch, large-variety production, Ou says, seems like a simple enough idea, but in fact it requires the development of sophisticated production systems and capabilities covering material selection, quality control, R&D, design, manufacturing and cost control.

"Actually, we have every reason to be optimistic about a successful transformation of the local auto-parts industry into a new AM/OEM dual-direction development stage, " Ou claims. "All the right signs are there."

"Taiwan auto-parts makers have been actively expanding their overseas sales, " Ou says, "This is not a coincident but a long and stable development process. Most local parts makers were founded as small enterprises and built up their strength through steady investment in molds and dies as well as in upgrading their technology and equipment. These strengths won't be easily outstripped in the short term. In the auto-parts line, production scale is less important than the integrated competitiveness of quality level, delivery speed, and other factors."

"That means local auto-parts makers can enter the OEM market by supplying products for car models produced in small volumes, " Ou comments. "In addition, international automakers often buy parts from suppliers in three to five nations in order to diversify their risk. Opportunities are always there, and the volumes will expand once you enter an automaker's global supply chain."

Rising Star: Auto Electronics

Another good chance for local companies, and not just for parts makers, is the auto electronics sector. Taiwan already has a globally competitive IT and electronics industry, and many leading such makers are eyeing auto-electronics as their next major profit earner.

Studies predict rapid growth in the auto electronics market in the near future, Ou says. "We have many reasons to be optimistic about the sector's development in Taiwan."

Taiwan, Ou says, has one of the most competitive automobile markets in the world as local consumers are always on the look for ever more high-tech onboard equipment. In Taiwan, all local automakers have technical cooperation ties with foreign auto brands, and their locally produced cars are equipped with the most advanced electronic equipment than the same models produced in other nations. That means opportunities too, Ou says, through links with foreign auto brands.

Government's Role

"The government is playing a vital role in prodding development of the island's auto-parts industry, " Ou claims. "This is seen not only in promotion but also in mapping out practical projects to help manufacturers."

According to Ou, the MOEA has mapped out comprehensive strategies and commissioned various units under the ministry to execute them. The overall project is divided into three major fields, including R&D, manufacturing, and international marketing.

The R&D projects, which are executed mainly by the Industrial Technology Department (ITD) under the MOEA, aim to upgrade and develop home-grown key techniques and technologies for modern vehicles, especially passenger cars.

Many key sub-projects in the R&D category have been executed for many years, such as the development projects of a series of automotive engines. The ITD also commissions a group of local universities and research institutes to conduct a series of R&D projects, including the Industrial Technology Research Institute (ITRI), Metal Industries Research & Development Centre (MIRDC), and Tze-Chiang Foundation of Science and Technology. The results of this research are transferred to the private sector for commercialization.

In the second category, the sub-projects of which are carried out mainly by the IDB, the government wants to help local auto-parts makers adopt more advanced quality-control systems, obtain required quality certifications, set up comprehensive central-satellite plant systems, and upgrade into e-enterprises. The IDB also cooperates with many different organizations and universities, such as the Corporate Synergy Development Center, ITRI, and MIRDC, to jointly execute related projects.

In the third field, international marketing and branding, the government commissions the Bureau of Foreign Trade (BOFT) to conduct a series of sales promotion sub-projects to help local makers develop international sales and build their brand image. The BOFT closely cooperates with organizations with global business ties, such as the Taiwan External Trade Development Council (TAITRA) and various overseas diplomatic branches, to explore possible opportunities.

The government's related efforts are clear and effective, Ou says. The BOFT, for example, recently started executing a project that will set up a task-force Auto Parts Resourcing Center (APRC), which aims to integrate local makers and big trading companies to form a comprehensive central-satellite plant system for tapping the international market; help local parts suppliers get needed information about the certification requirements, related regulations and rules in targeted markets, automakers' specifications and requirements for parts, and various nations' different quality requirements; and set up a beachhead (including offices and warehouses) in Detroit to tap into the supply chain's of the Big-Three U.S. automakers.

Eye on AM Opportunities

For the AM parts sector, in which Taiwan has become the world's largest supply base, Ou says that local makers of such products will continue investing in developing molds and dies to enrich their product lines, already unmatched in their comprehensiveness, and further consolidate their leading positions. "AM parts manufacturing was the launch pad for Taiwan's leap into the OE/OEM market, " Ou says. "In the past 20-some years, the island's AM parts makers have accumulated globally unmatched strengths in development, manufacturing and sales."

Taiwan, Ou points out, is exporting more technology, molds/dies, and know-how for the auto-parts line, demonstration of the local industry's rise up the value chain.

The burgeoning mainland China market is also abetting the rise of Taiwan's auto-parts line. Ou is optimistic that, despite political obstacles between the two sides, cross-strait cooperation in the auto-parts and auto-making lines will continue to gather pace and drive Taiwan's auto-parts business to new heights. (QL)