Chinese Auto Parts is World’s Most Profitable Vehicle Industry

The automotive parts industry in China has reportedly become the world’s most profit making industry of its kind. According to a survey report produced by AlixPartners, the profits of auto parts enterprises in China topped its counterparts in 2009. Average profit levels were 8 – 10 per cent, which is apparently double the global average. In 2009, the revenue of auto parts enterprises in China is said to have reached 1,140 billion yuan, an increase of 23 per cent over 2008. However, supplier sales are said to ahve lagged behind the OEM growth because of a higher decline in exports. Several major domestic auto-parts suppliers are emerging as winners, with companies entering the top 100 global suppliers by revenue.

However, says the study, in order to maintain their profitability, suppliers need to effectively manage rising cost pressures, upgrade their technology, build their aftermarket capabilities and, significantly, find ways to recruit and retain qualified people in what has become a very competitive labour market.

7 per cent of senior executives said they were concerned about recent increases in material costs, while more than half said they are seeing increased “cost-down” pressures from OEMs. About 65 per cent of those polled said improving existing technology is a high priority requirement they are now seeing from their customers.

“The good news is that China’s auto industry is doing so well today and we expect the market to continue to grow at a healthy rate, an average of 15-20 per cent over the next five years,” said Ivo Naumann, managing director of AlixPartners and head of the firm’s Shanghai office. “The bad news is that the positive profitability momentum is unlikely to be maintained…”

China’s light-vehicle sales grew by 55 per cent in 2009, the largest market increase in the world, compared to an 8 per cent rise in 2008, and growth rocketed to in excess of 80 per cent in the last two quarters of 2009 and 77 per cent in the first quarter of 2010.  Survey respondents predicted growth of an average of 20 per cent per annum between now and 2015.

Additionally, survey respondents said they expect the domestic market share of China’s OEMs to grow to 37 per cent by 2015, with, they said, the likes of Geely, BYD and SAIC being the biggest beneficiaries. China’s OEMs increased their domestic market share to 32 per cent in 2009, compared with 27 per cent in 2006, largely driven by increasing demand in so-called third- and fourth-tier Chinese cities, which, the study points out, resulted in a segment shift towards smaller cars, and a massive expansion in domestic models, to 159 from just 53 in 2006.

Consolidation expected

In terms of consolidation, mergers and acquisitions are expected to rise, according to the study.  In fact, all survey respondents predicted increased M&A activity this year and next, especially in the domestic Chinese market.

“M&A activity in the auto industry was widely anticipated a couple of years ago…most companies realised the many challenges involved and did not proceed, with a few high-profile exceptions, notably Geely’s acquisition of Volvo,” said Christian Paul, a director in AlixPartners Shanghai office. “Going forward, we expect domestic M&A deals to accelerate resulting in the emergence of more globally significant domestic companies. In the auto-parts sector specifically, several Chinese companies have, of course, already made acquisitions in Europe and the US, and more are anticipated.”

The study, the AlixPartners 2010 China Auto Outlook, conducted for the third consecutive year in China and for a decade globally, analysed data gathered from an in-depth survey with 50 senior executives from both foreign and domestic players in China’s auto-supply and OEM sectors, plus from extensive research of the industry in China.

China’s Top 10 Automotive Parts Import Countries, March 2010

Source: China Automotive Information Net, April 2010

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