Multinational Tier 1 suppliers agree that the recent rise in the cost of raw materials and labor are posing real pressures on their operations in China.
“The pressure is real and acute,” said Dr. Choon T. Chon, president of Delphi Asia Pacific and Delphi China during a Q&A session at CBU’s 2008 Presidents’ Forum held on April 16-18 in Beijing. “We have been trying to find quality local suppliers in China. In addition, we are also trying to localize design so as to reduce cost. Our bottom line is to ensure our growth margins,” Chon said.
(photo: Delphi Asia Pacific Choon T. Chon)
Chon was one of three panelists discussing challenges and opportunities of global parts and components manufacturers in supplying competing global and local platforms in China.
Valeo Group China vice president Christian Marsais said Tier 1 suppliers face great pressure from OEMs to cut cost, despite rising cost of raw materials. “As a general rule, multinational OEMs would want the cost of their parts and components 10-20 percent lower than that of their home countries,” Marsais said.
(photo: Valeo Group China Christian Marsais)
“Although local Chinese suppliers offer cheaper products, but for the time being they can only be our potential suppliers because of quality issues,” Marsais told the audience. He admitted that for multinational suppliers like Valeo, which are now rooted in the China market for more than 10 years, “competition is growing with the arrival of other multinationals as well as the emergence of local players.”
(photo: Magna International Keith Lomason)
Keith Lomason, Magna International China’s executive director, agreed that Tier 1 suppliers are facing tougher challenges of increased cost pressures both upstream and downstream. “Similar to what has been happening in North America and Europe, both OEMs and suppliers in China are faced with the pressure to reduce cost. As a Tier 1 supplier, we normally would like to be given enough lead time from OEMs to work together on reducing cost,” Lomason said.
A second challenge for multinational suppliers in China has to deal with not only all international platforms but also platforms created by local Chinese automakers. Marsais said in his presentation that already all of the 18 global platforms with an annual output over one million units are being made in China. While this offers certain benefits such as capacity optimization and flexibility, it also creates standardization and volume risks.
The third challenge is competition from local suppliers and the protection of intellectual property rights. Chon said that although many local suppliers still face issues of quality, some are able to provide good quality parts for OEMs at a cost 30 percent lower than multinational suppliers. “Their product looks even better than ours,” Chon said. “And it poses a real challenge for us.”
The only way to win over OEMs, according to the panelists, is to provide high quality parts and components with advanced technology at a competitive price. Multinational suppliers have tightened measures of protecting their know-how and IPR, even though they are often confronted with IPR infringement and copying in the aftermarket. “More and more OEMs in China decide to use our products because of our first-rate quality,” said Chon.
Asked by the audience to list the three most important factors for success in China, Chon said they are time, speed and knowledge. “Mencius says success depends on time, location and people. In China for a Tier 1 supplier you must come at the right time to the right place with the right knowledge or technology,” Chon said.
Marsais said to Valeo, technology, resources and speed are most important. “Valeo is making a great effort in providing localized technology solutions for OEMs in China so that to help our customers develop a multitude of different vehicle products,” he said.
To Magna International, the three most important factors are cost, cost and cost. “Ten years ago, the most important element of success was cost and today the same is true,” Lomason said. “But human resource is an important factor for the immediate future and technology an important factor for the long-term. You must be able to have a team of engineers to help resolve tough issues of your customers. As a global supplier, you must have the best technology that can meet the requirements of all platforms.”