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Chinese suppliers move up the value scale

Some Chinese suppliers are moving up the value scale, now producing modules and assemblies for export.

Purchasing executives from BMW and Chrysler face different situations, but both have seen improvements in parts from China to be used in Europe or North America.

Alan Zeng, purchasing director of the Chrysler China Regional Sourcing Office, said Chrysler recently signed a new $100 million contract with a Chinese supplier for a project that starts in 2012. Such a contract demonstrates that the more upstream business is possible.

This year Chrysler is importing $460 million in components from China, of which 35 percent are modules and assemblies and 65 percent are parts. In 2005, all the business was in parts, and the total was $150 million.

Another change is that just five years ago, all Chrysler business in China involved resourcing contracts to get lower costs. Now all the business is with new contracts.

Martin Lockström, who is director of BMW’s Supply Chain Management Institute Center for Purchasing and Supply Chain Management, reported on a case study involving a German OEM with a global presence that began with frustrations.

The OEM wanted quality, low-cost parts in the low volumes of a prestige car. The biggest suppliers in China who could meet the quality were’t interested in the small volumes, and the Chinese domestic suppliers did’t have the R&D to support the projects. The company has a plant in China and was under pressure to increase local content, but orders from headquarters in Germany were not enough to make it happen.

“The company had too few resources in China, not enough headcount to focus on strategic issues,” he said, “so it could’t work on strategy, at best it could only make tactical decisions.”

Chinese suppliers were happy to listen and they learned fast, but soon after the training period was over, quality slipped.

When the chief purchasing officer at headquarters decided that the company needed to make it happen, it did. The local staff grew from five to 100 over five years, relationships with suppliers were made tighter and earlier, and local content in the China plant rose from 40 percent to 60 percent.

“In one year, the company tripled its exported sourcing volume and achieved a 20 percent landed cost savings, doubled the number of qualified suppliers, and had a PPM as good as anyone,” said Lockström. “Some did 100 percent quality inspection, which is only possible where labor is inexpensive.”

The German client is still buying only parts, not modules, because not many suppliers in China do value engineering, or gray or black box engineering.

“A lot of small suppliers do not have strong management systems” to control a module operation, said Chrysler’s Zeng, but if they can join with a European or U.S. partner or develop a robust management system, they can compete internationally.

One of Chrysler’s new module programs is a power steering gear module made of 60 different parts in China. The value of the Chinese currency has strengthened by 30 percent, said Zeng, reducing the low-cost aspect of individual parts and commodities, so modules which have low-cost labor in them are now more attractive.

Chinese suppliers are learning to meet the needs of international automakers better at the same time that the financial crisis has created new opportunities.

“Because U.S. suppliers are in trouble,” says Zeng, “Chinese suppliers have an opportunity to grab new programs.”

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