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Entering Mainland's Automobile Supply Chain － Opportunities for Auto Part and Related Industries

Executive Summary

The mainland is now the fourth-largest automobile producer, and the third-largest market in terms of production and sales volume respectively in the globe. Demand for automobiles is set to rise further on the back of a number of favourable factors, including continued growth in highway infrastructure, growing mobility of people, increases in freight transport and the extremely high ratio of persons per automobile on the mainland. While the recent macroeconomic tightening measures may have a short-term impact on the mainland's automobile market, the medium- and long-term prospects remain promising. Automobile assemblers, as well as various auto part and accessory suppliers and their sub-contractors, should make long-term commitment to tap the mainland market.
A Boon to Auto Part and Related Industries
Backed by increasing demand on the mainland, the annual automobile production of over four million has elicited robust input demand for a comprehensive range of auto parts and accessories, spanning from metal items, plastic and rubber parts to electrical and electronic devices. As an automobile is composed of thousands of items, which are produced by over 50 industries with different expertise, the spill-over effects of the automobile production growth should benefit not only suppliers of direct auto parts, but also a wide range of component suppliers and sub-contractors in different industries. On the other hand, mainland's vehicle ownership, driven mainly by sedan and passenger car segments, has exceeded 23 million units, nearly doubling the 1998 level of 13 million. As the ownership level is expected to rise further, demand from the aftermarket for spare parts for repair and maintenance is set to continue to increase.
Emerging Opportunities in the Supply Chain
Not surprisingly, the automobile supply chain is highly organised with players operating like a cartel, making it difficult for newcomers to penetrate into the market. But the mainland's industry is under restructuring and consolidation, due mainly to challenges stemming from market opening under China's WTO commitment.
A case in point is that the mainland will remove its import quotas imposed on automobiles and auto parts and accessories completely by 1 January 2005.
It is also set to lower import tariffs on automobiles to a maximum of 25%, and to reduce tariffs on auto parts and accessories to an average of 10% by 1 July 2006.

In the process, the substantial lowering of import tariffs, especially on automobiles, has already intensified competition in the market. Both the domestic and joint venture assemblers are pushed to review their supply chains in order to improve product quality, while minimising costs by enhancing their sourcing from quality but competitive suppliers. Such pressures are likewise passed up the supply chain from assemblers to first-, second- and third-tier suppliers. As a result, a re-alignment is happening in the supply chain, in turn creating leeway for new but competent, competitive suppliers.

Getting Ready to Meet Stringent Requirements
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