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Electronics Production | January 03, 2011

Chinese automotive supplier market: How long will the party last?

Almost 20% of total revenues at European car suppliers depend on market development in China. Private vehicle sales in China will exceed 18 million units by 2015, but growth rates will then decline substantially, states Roland Berger Consultants.

The global revenues of European automotive suppliers are almost back at pre-crisis levels. But almost 20% of supplier revenues in Europe now depend on how the market in China develops. After a decade of strong growth, the Chinese market for passenger cars will exceed 11 million units in 2010. According to the Roland Berger analysis, private vehicle sales in China will exceed 18 million units by 2015, but growth rates will decline substantially. The major drivers of future private vehicle market development are rapid GDP growth and rising disposable income. Although China's economy is still expected to grow considerably over the next few years, it will be faced with several significant challenges such as currency appreciation, unsustainable stimulus plans, tighter monetary policy, unemployment and rising labor costs. There are three main areas of focus for Western automotive suppliers: accurate volume planning, the impact of localization and revisited business models. "Approximately 18% of the total revenues of a typical European supplier depend on how the market develops in China," says Roland Berger Partner Marcus Berret. Although the global revenues of European auto suppliers are almost back to pre-crisis levels, almost 20% of suppliers' revenues now depend on China. Growth rates for passenger cars expected to decline "China's private vehicle market experienced strong growth of 35% p.a. from 2001 to 2007, mainly driven by booming sales of private cars. The private vehicle market then slowed down in 2008 due to the global economic crisis," says Roland Berger expert Marcus Hoffmann. "Thanks to the government stimulus plan to boost automotive sales, growth of around 50% was achieved in 2009." Furthermore, market shares by vehicle segment, OEM brand and country of origin remained relatively constant during the period 2005 to 2009. According to the Roland Berger forecast, private vehicle sales in China will exceed 18 million units by 2015. Despite this, growth rates for passenger cars in China are expected to decrease substantially. Fast GDP growth and rising disposable income will be the two main drivers of car market development. "Generally speaking, China's economy is still expected to experience attractive growth in the next few years, despite some significant upcoming challenges, such as currency appreciation, which will reduce China's exports, the unsustainable government stimulus package, tighter monetary policy, unemployment and high labor costs," states Berret. "Despite these challenges, the overall Chinese economy is still fundamentally stable. According to our analysis, however, sustained economic growth is likely in China, though at a slower pace than in previous years." Main implications for Western auto suppliers There are three key consequences for Western auto suppliers. First of all, car suppliers will have to plan volumes very cautiously in 2011 and base them on scenarios, as growth rates will be significantly lower in the next few years and therefore sales in China will not necessarily prop up suppliers' business in 2011. Second, OEMs are shifting more and more production capacity directly to China, with strong pressure from OEMs to localize parts. Localization rates tend to increase by 3-5% annually. As a result, delivery volumes in Europe are under pressure. Hence, Western auto suppliers have to carefully study the potential impact of a further increase in localized parts supply. Finally, increasing labor costs and rising exchange rates make parts exports from China less attractive. "Moreover, there is continued improvement in skills and R&D capacity in China and thus we can see a trend toward higher value-added activities," states Hoffmann. Berret concludes: "Western auto suppliers need to urgently revisit their current business model for Chinese operations in order to retain their market positions in China."
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