Where car sales boom so will the auto parts segment. Such truism was played out in China in 2009 with its auto parts makers posting a banner year, thanks to the official subsidies that drove up new car sales and hence also fueling downstream demand for auto parts. Most auto parts makers were especially busy meeting mounting orders in the last quarter, traditionally the sales peak season. Makers estimate that orders placed in the fourth quarter grew by at least 10% from the previous quarter.

Such rapid growth in 2009, companies say, was deceptive as merely having returned sales level back to pre-meltdown level, with the global crash having erased over 30% of business.

Auto parts sales not only surged in China but also in North America and Europe where markets started to rebound mid-summer. The global market recovery likely was driven partly by the various official subsidy programs to boost new car sales, including the Cash-for-Clunker in the U.S. Also refilling depleted inventory by auto parts shops due to slashed reordering in the wake of bailouts of the Big Three contributed to the surging recovery.

China Plants Profitable
Ta Yih Industrial, maker of auto lights, estimates its export to North America increased 30-35% during the fourth quarter of 2009, with such performance seeming commonplace for many peers achieved similar growths.

Both OEM and AM (after market) orders increased, while some makers believe the orders received during the fourth quarter of 2009 should keep the production lines humming till the first quarter of 2010.

Migrating to China has been the right move for Taiwan’s Tong Yang Group, which extended production to China a decade ago, for the maker estimates its China plants in 2009 generated record profits of over US$412.5 million. Many auto parts makers also posted record high profits from China’s market in 2009.

Expand Global Share
Having dethroned the U.S. as the world’s biggest car market in 2009, China is now setting sights on promoting auto parts export, aiming to command 10% of global market share by 2020. China’s auto parts makers have, backed by cost advantage, expanded rapidly overseas in the past decade, posting annual growths of nearly 50% from 2001 to 2007, with annual export amounting to US$30.2 billion in 2008.


China is encouraging auto parts makers to upgrade manufacturing technologies to produce higher-end products to tap new niches, likely ones with potentially higher profitability. The National Development and Reform Commission, the Ministry of Commerce, and the Ministry of Finance jointly drafted an auto parts export promotion program to structurally change China’s auto parts exports, aiming to wean itself from exporting slim-profit, single-items to become OEMs to major global automakers, as is the dream of most auto parts makers with the capacity and ambition.

Move to Higher-end Products
The program will also encourage makers to gradually shift to making higher-end electric and electronic parts, especially so-called “energy-saving” items, instead of low-end after-market products.

Partnering with overseas suppliers would be an essential part to this structural shift. China’s Gily Automobile and Taiwan’s Yulon Motor last November signed a cooperation memorandum of understating (MOU), marking a significant move, with the joint venture to see Yulon assemble Gily’s Pandas in Taiwan for the first EV on the island, with all parts shipped from China except the battery to be developed by the Yulon Group independently.

China’s automakers have used such strategy before as a cost-competitive means to export ready-to-drive cars, mostly to emerging markets in the Middle East and South America. They set up auto assembly lines in the end markets, import major parts from China’s parent companies, assemble the cars, and then sell them locally.

Panda, however, is not a popularly-priced car, but in a higher niche as most EVs end up being priced relatively higher than conventional cars.

FTA Also Helps
The free trade agreement (FTA) signed between China and the Association of Southeast Asian Nations (ASEAN), effective since the beginning of this year, will also favor China’s program to further build auto parts export.

The FTA is making auto parts trading easier among China and the six ASEAN founding members (Thailand, Malaysia, Indonesia, the Philippines, Singapore, and Brunei), with tariffs on auto parts traded among the signatories having been cut to nearly zero, and the other four ASEAN members (Vietnam, Myanmar, Cambodia, and the Leos) to follow suit by 2015.

Domestically, Beijing also announced last August several export stimulus measures as the full export tax rebate, aiming to reduce exporters’ financial burden.

In fact, giving export tax rebate has been widely applied by WTO members to boost national exports. China’s export tax rebate policy dates back to 1985 as Beijing announced partial refunds for consumption taxes and value added tax (VAT) paid by exporters.

Reversing Cut Tax Rebates
Responding to surging exports in the late 1990s, Beijing started to cut the tax rebate rate starting in early 2000, but is considering to reverse the trend in light of the global downturn, perhaps to fully refund export taxes to exporters, with auto parts exports to be subject to rebates as high as 17%.

The auto-parts promotion program also makes available to exporters favorably-rated loans.

China’s move to cut a bigger swath in the global auto parts segment may also be to address the nation’s sagging foreign trade over the past year. The latest statistics show that China suffered a year-on-year decline of 17.5% in foreign trade in the first 11 months of 2009, totaling US$1.96 trillion, wiping away an astounding 30% from its trade surplus.

The post-meltdown 2009 is regarded abysmal for China’s exporters. As many of China’s buyer nations, especially in the developed West, struggle with the gradual but uncertain recovery, many strategies are being promoted and adopted. One such measure, even sometimes touted by president Obama, is to buy local. And protectionism is skin to sprinkling salt on exporters’ barely recuperating lesions cut by the global downturn. Coupled with, since May 2005 according to Forex Blog online, the American Congress voting to threaten China with a 27.5% across-the-board tariff if the RMB was not permitted to float, as well as American manufacturers lobbying to officially label China a "currency manipulator," the rising RMB against the greenback, China-made goods’ cost edge globally could continue to be eroded.

(by Michelle Hsu)