China’s Automotive Components Industry: Opportunities Amid Crisis

China’s economy has entered a “new normal” with slower growth, and the growth rate of the automotive industry has also declined. Automotive component enterprises have faced unprecedented shocks, leading to a host of problems. Nevertheless, amid the crisis, some strong component enterprises have proven through their achievements that by planning ahead, focusing on research and development (R&D), and implementing genuine transformation, new development opportunities can still be found.

The Automotive Components Industry: “Opportunities in Peril”

Overall Profitability Is Declining, but Enterprises with Strong Technological Potential Continue to Grow

It is an undeniable fact that the profitability of China’s automotive components industry has declined over the past two years. However, at the same time, we have seen that the profitability of component enterprises with relatively high technological capabilities is on the rise.

According to statistics from the 2013 annual reports of 71 listed component enterprises, their total operating revenue reached 33.49 billion yuan, an increase of 14.17% year-on-year; net profit stood at 1.91 billion yuan, up 11.32% year-on-year. Yet their average net profit margin was only 6.05%, a 11.55% decrease from the previous year. The average net profit margin was 6.84% in 2012 and 7.53% in 2011. Data from the past three years clearly shows a steady decline in the profitability of component enterprises.

One of the reasons for this sustained decline is that independent component enterprises mainly supply the commercial vehicle sector. Over the past three years, the commercial vehicle sector has only achieved positive growth in one year, with significant declines in the other two. Looking at the development and changes of China’s truck industry over the past decade, there have been five years of high growth and five years of negative growth. The decline of the commercial vehicle sector has severely impacted the components industry.

Imports of Key Components Have Increased, While Exports of Low-End Products Face Setbacks

According to data from China’s General Administration of Customs, from January to June 2014, China’s imports of automotive products reached USD 48.01 billion, and exports reached USD 40.023 billion, up 28.28% and 7.33% respectively compared with the same period the previous year. China imported automotive components worth USD 17.726 billion and exported USD 30.913 billion worth of components, with both figures showing year-on-year growth.

Although exports of automotive components have increased, imports of key components—such as automatic transmissions, controllers, and electronic injection systems—have grown even faster. In recent years, many countries have initiated anti-dumping and countervailing investigations against Chinese automotive components, and the European Union has introduced a tire labeling law. All these factors have severely affected China’s exports of relevant components.

Rapid Growth of Foreign Investment Poses Severe Challenges to Independent Component Enterprises

Currently, foreign automotive component enterprises continue to grow rapidly in the Chinese market. They are confident in the future of the Chinese market and maintain technological leadership, while independent Chinese component products remain at a disadvantage. Foreign companies such as Bosch, Delphi, and Faurecia all plan to double their growth in China.

After years of efforts, foreign automotive component enterprises have firmly occupied the high-end segment of China’s automotive components market through their technological advantages. Furthermore, in recent years, many foreign component brands have begun to cut prices sharply, squeezing the low-end market segment that was previously dominated by local Chinese components. This has made the survival of independent component enterprises even more difficult. Some new high-investment products—such as anti-lock braking systems (ABS) and electronic injection systems—have lost their price advantage amid the sharp price cuts of foreign products, making their market promotion extremely challenging.

Automakers’ Trust in Independent Component Enterprises Is Declining, and Discrimination Exists

For a long time, the relationship between automakers and component enterprises in China has been fraught with tensions. In particular, Chinese and foreign component enterprises are treated differently, which exacerbates the predicament of independent component enterprises. For example, automakers apply different pricing standards to domestic and foreign enterprises, deny independent component enterprises the opportunity to participate in fair tenders, and refuse to reimburse local enterprises for product R&D costs. Such discriminatory practices by automakers—especially independent automakers—during the procurement process leave many local component enterprises feeling marginalized and helpless.

Upgrading the supply chain is a key measure for the transformation and modernization of independent automakers, and in this process, a large number of foreign component brands are selected. An increasing number of independent automakers are closing their doors to local component enterprises.

The development of a strong components industry requires conscious efforts from automakers. The fate of independent automakers is closely tied to the development of the local components industry. If Chinese automakers and component enterprises continue to maintain such a relationship, China’s automotive industry will face a severe crisis in the future.

Component Enterprises Lack Policy Support

The lack of policy support for China’s automotive components industry is an indisputable fact. Currently, component enterprises in China are in a state of unorganized and uncoordinated “fighting alone.” This is a completely free market competition environment, and the positive role that the government should play is practically invisible.

Policies introduced in recent years have mainly focused on vehicle manufacturing. A typical example is new energy vehicles—a national strategic emerging industry. Substantial subsidies are allocated to automakers, while enterprises producing core components such as batteries and electric motors receive almost no support.

At a symposium for returned automotive talents organized by China Automotive News, foreign experts in China’s automotive industry unanimously appealed: Since the development of component enterprises is the key to strengthening China’s automotive industry, can policy support be balanced in favor of component enterprises—beyond stimulating and encouraging the development of automakers—to facilitate the better development of China’s components industry?

Investment Channels Are Monopolized, and Strong Financial Support for Technological Innovation Is Lacking

Chinese component enterprises have limited investment and financing channels, and access to production factors is monopolized. In recent years, some local governments have provided automakers with free production factors such as land and capital, but support for component enterprises is rarely heard of.

Amid the slowdown of the automotive market and the survival difficulties of component enterprises, some have cut R&D investment to retain market share and reduce costs. R&D investment by Chinese automotive component enterprises is already insufficient: an R&D investment ratio of 2–3% of sales revenue is considered “good,” while transnational companies such as Bosch invest over 5% of their sales revenue in R&D, with some even reaching 10%. A lack of investment in innovation will only widen the gap between Chinese and foreign component enterprises.

Severe Problems Exist in Systems and Mechanisms, with Great Potential for Reform

Chinese component enterprises have significant potential for reforming their systems and mechanisms, and there are still “dividends” to be reaped from such reforms. Some old component enterprises are currently struggling with rigid systems and mechanisms, adherence to outdated rules, and inability to transform in a timely manner—leading to their marginalization or even elimination.

In contrast, a large number of private and mixed-ownership component enterprises, thanks to their flexible systems and mechanisms, can quickly respond to market changes and have high adaptability. Currently, many of these enterprises are in a sound development state. Some private and mixed-ownership component enterprises with clear visions and aspirations have definite strategic goals and plans, as well as the determination and perseverance to become “long-standing enterprises.”

Institutional obstacles also manifest in inter-enterprise alliances. There are numerous associations in China’s automotive industry, and industry-academia-research cooperation has been carried out for many years. However, many scientific achievements fail to be translated into practical applications, and many associations yield no tangible results. Of course, there are positive examples: the Automotive Lightweight Innovation Alliance organized by the Chinese Society of Automotive Engineers, and the large-scale automotive components park in the New Area of Hangzhou Bay, Zhejiang Province—both of which have achieved good results.

Talent Shortages Persist, but Leading Talents in Technological Innovation Are Emerging

During the recent Beijing Auto Show, we conducted a survey of automotive component enterprises. The results show that talent shortages have led to the technological backwardness of independent component enterprises, which is the main reason for the backwardness of independent automakers. When asked about the most scarce talents, engineers and managers received the most votes, followed by sales talents and frontline workers. No enterprise believes that it “has enough talents.”

Nevertheless, we are pleased to see that leading talents in technological innovation are emerging in the components industry—especially university professors and researchers who are leading innovation and R&D in key components and technologies, bringing hope to the industry. For example, Professor Sun Jian from Tsinghua University led the development of AMT (Automated Manual Transmission) for Suzhou Green Control, and Professor Sui Xianyan from Beihang University played a key role in the innovative project of Shengrui 8AT (8-speed Automatic Transmission).

Changes Among Hundreds of Component Suppliers

It is undeniable that China’s automotive components industry faces many problems, but there is no need to overstate its shortcomings. We should also recognize the growth and progress of independent component enterprises. For instance, China’s “Top 100 Component Suppliers” are leaders in their respective market segments, driving the development of these segments. They have successfully implemented transformation and modernization, achieved excellence in specialization, some have achieved leapfrog growth through overseas acquisitions, some have entered the supply chains of transnational automakers, some are already competing with transnational component companies in key core components, and others are advancing in the field of energy conservation and emission reduction.

Significant Progress in Specialization

Practice has proven that the only way forward for the components industry is to pursue refinement, specialization, innovation, and uniqueness. To become a leader in its segment, a component enterprise can perfect its products by leveraging specialized technologies and a dedicated team. For example, Longcheng Precision Fabricating—a private enterprise located in Wujin, Jiangsu Province—only produces a small part: engine valve lifters. Yet it holds 33% of the global wholesale market. The global wholesale market for this part is 180 million units, and Longcheng Precision Fabricating supplies 60 million units, making it a preferred supplier for engine enterprises such as Bosch, Valeo, and Remy.

Acquiring Advanced International Technologies Through Overseas Purchases

For example, BYD acquired the German company Pury, becoming the exclusive supplier of battery management systems for BMW’s electric vehicles and a supplier of driver control systems for luxury brands such as Audi, BMW, and Mercedes-Benz—enabling these luxury brands to bear a “Chinese imprint.” Thanks to this, BYD achieved leapfrog growth, with its revenue reaching 7 billion yuan.

Increased Influence in Specific Segments and Enhanced International Competitiveness

In the field of automotive wheels, Zhejiang Wanfeng Auto Wheel Co., Ltd. has entered a phase of in-depth strategic cooperation with international automakers such as GM, BMW, and Ford. It is not only a global strategic supplier for GM and BMW, but also became an exclusive supplier for Land Rover in China last year. In 2023, it successfully entered Toyota’s supply chain in Japan.

In the field of airbags, Jinzhou Jinheng Automobile Safety System Co., Ltd. has successfully overcome the suppression of transnational competitors such as Autoliv, TRW, and Takata in recent years and entered the supply chains of transnational automakers such as Volkswagen, Peugeot, and Citroen.

In addition, many local enterprises have become global sales leaders in their segments: for example, Jinzhou Wanyou in shock absorbers, Far East Transmission in commercial vehicle drive shafts, and Faust in commercial vehicle transmissions.

Successful Product Transformation and Modernization

For example, Bohai Piston—a leader in commercial vehicle pistons in China—has successfully expanded into the passenger vehicle market in recent years. It has not only established in-depth cooperation with independent brands such as Geely, Chery, BYD, and Jianghuai, but also successfully entered the supply chains of European and American automakers. Its excellent quality has won the recognition of procurement executives at Volkswagen Group in Germany. In 2013, the company began mass supply to Volkswagen Germany; in 2014, it passed Daimler-Benz’s VDA6.3 audit with a high score of 91.4 and became an A-level supplier to Daimler-Benz—one of the world’s top four automotive groups.

In addition, there are many small innovative enterprises with great growth potential. For example, after years of R&D on three-way rare earth catalysts for automotive emission control, Kunming Guiyan Catalyst Co., Ltd. successfully entered Volkswagen’s supply chain. Lopal Petrochemical started developing automotive urea products a few years ago and now holds 70% of the automotive urea market.

Breakthroughs in Key Components and a Fundamental Shift in Innovation Models

In recent years, local component companies have made important breakthroughs in key core products such as automatic transmissions. Fast’s automatic transmissions for commercial vehicles are already used in small quantities in buses and terminal tractors. After seven years of R&D, Shandong Shengrui Transmission’s 8AT has entered a critical stage of industrialization. The mass production of 8AT will not only undermine the position of foreign investors in this field, but also have a far-reaching impact on the development of China’s independent automatic transmission industry.

We are particularly pleased to see that today, local component companies no longer focus solely on scale, but pay more attention to product quality; they are no longer satisfied with revenue growth, but focus more on operational quality; instead of emphasizing the competitiveness of individual products, they concentrate more on the competitiveness of the entire system. This means that the previous extensive business model is gradually being abandoned.

Automotive Components: The Main Arena for Automotive Technological Innovation

Today, the situation of China’s automotive components industry can be described as “opportunities amid peril.” The challenges facing the industry are severe, but the large and diverse market demand, the changing industrial structure, and various merger and reorganization opportunities in the global market provide room for breakthroughs.

Currently, judging from the development trends of China’s automotive market, the main arena for future innovation and development of China’s automotive industry lies in automotive components. Components are the foundation of the automotive industry, and vehicle manufacturing technologies originate from component technological innovations.

At present, the integrated innovation capability of vehicle manufacturing has reached a high level, but the development level and innovation capability of components lag behind the pace of vehicle manufacturing. This creates opportunities for innovation and development in the current and future automotive components market. This opportunity is driven by the market, which will inevitably determine the allocation of resources. In a market-oriented resource allocation environment, private enterprises and mixed-ownership enterprises will become the main force to seize this opportunity. These companies will not only be able to take advantage of the opportunity, but also convert it into core capabilities. I have a hunch that their international influence will grow tremendously, and innovations in two areas—new energy and the internet—will be remarkable.