AIAG/IBM Study Foresees Intense Battle Ahead in China’s Automotive Sector

As China’s automotive suppliers rush to meet the demands of the world’s fastest-growing automotive market, an overcapacity problem already may be brewing, according to a new study written by Economist Corporate Network and released by the Automotive Industry Action Group and IBM Business Consulting Services’ Institute for Business Value.

The quest to add manufacturing capacity is taking place at a faster rate than expected market growth, raising overcapacity concerns and the possibility of a shakeout within five years.

In pursuit of lean operations, automakers worldwide have focused on technology investment. The China Auto Suppliers Survey looked at how China’s automotive suppliers make use of process and production technology.

The study found that information technology spending by automotive suppliers in China was generally low, with more than three-quarters of respondents investing less than $100,000 per year. It also examined major concerns, including an overwhelming need to find and retain reliable staff, which was cited by survey respondents as a barrier to successful development. With regard to automated operations, less than a quarter of respondents use enterprise resource planning systems.

"This study makes it clear how standardization of business process and technology could catapult China into a crucial position in the global automotive industry," says Andrew J. Cummins, executive director of AIAG. "Specifically, the research suggests the urgent need for suppliers in China to embrace common criteria, benchmarks and tools for business process and performance in order to achieve the cost-competitiveness they seek."

Although the building blocks of advanced manufacturing concepts such as vendor-managed inventory are hardly present in China, more than two-thirds of companies surveyed said they want to improve their business processes in order to engage in inventory management, more accurate production planning and tracking through bar-code labeling.

The study concludes that China’s domestic companies and joint ventures perceive cost-competitiveness--not quality--as a significant barrier to increased exports, and that it may be a question of production efficiency and economy of scale.

More than half of respondents plan to increase annual manufacturing capacity by more than 20 percent over the next five years, and just one in five expects market demand to equal that rate of growth. Moreover, Chinese domestic automotive suppliers are focused on export to Southeast Asia; foreign joint ventures plan exports to North America and Japan as well.

"This study reveals extraordinary developments in the region’s automotive industry--and the volume of response suggests China’s automotive suppliers are both aggressive and ambitious in their efforts to become an engine for global industry," says Dan Blake, global automotive industry leader at IBM Business Consulting Services. "A critical success factor will be the extent to which they invest in the infrastructure required to make the engine a cost-competitive proposition."

The survey, conducted by Economist Corporate Network, polled nearly 300 respondents serving the light-vehicle market in China--cars, light trucks and buses up to 3.5 tons. The survey gathered insight into the forces fueling industry growth, as well as respondents’ plans to manage and resolve market challenges. Of the suppliers surveyed, 57 percent were purely domestic Chinese companies and 43 percent were foreign joint ventures. AMT, a firm specializing in Chinese market research, carried out the research in Chinese in February 2004.

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