Globalizing the Small, Task-Oriented Vehicle Industry

Globalizing the Small, Task-Oriented Vehicle Industry

by Gearoid Hogan

While “globalization” is a common buzzword these days, understanding its implications and acting upon them for growth or survival, as the case may be, is another story.  Each industry and each company within an industry must develop a strategy and act upon it in a timely manner to effectively adapt to this fast-moving process.  How to do this, proper timing, allocation of internal financial and managerial resources are all thorny issues that every company must grapple with.

The recent Hong Kong Auto Parts Fair (April 28-May 1), hosted by the Hong Kong Trade Development Council, was both a real-time snapshot of globalization in action and a window to future developments in worldwide trade and development.  Auto parts manufacturing is burgeoning in China and in other Asian countries, such as Taiwan and India, and Asia-based companies are already supplying a myriad of parts and components to U.S.-based companies.

This article focuses on aspects of the Hong Kong Auto Parts Fair, the context of Chinese automotive and vehicular industry development and the implications for the small, task-oriented vehicle (STOV) industry in the United States, and an adaptive strategy for U.S. companies.  First, however, some definitions are needed, as well as background on the role of international trade fairs in general and the Hong Kong Auto Parts Fair in particular.

What is a Small, Task-Oriented Vehicle (STOV)?

The small, task-oriented vehicle can be defined in terms of its dimensions and the market needs for which it provides a solution.  Smallness is an important characteristic.  The STOV is smaller than most of the mainstream vehicles which it can replace; e.g., a full-sized pickup truck, an automobile, a farm tractor, or a van.  The smaller size has advantages for accessibility to the needed task or work and has significant implications for cost-of-operation.  In most cases, particularly with regard to electric power, it is far more environmentally friendly compared to its larger counterparts.

Task-orientation implies design adaptation to a focused work effort.  Airport terminal transport of passengers is a familiar example, as is light haulage of materials, tools, and other supplies in a warehouse.  Such focused work efforts are multiplied across a myriad of operating environments from gated communities, to golf courses, college campuses, campgrounds, and government fleets.

Improved Technology and Performance Appeals to Broader Market

As manufacturers improve the STOV performance characteristics, application of the STOV concept reaches a broader market.  This is especially true of electric powered STOVs as battery and electric drive components improve, providing more power and longer run times.  As these improvements occur, the STOV progressively becomes a more attractive substitute for the “mainstream” equivalent, whether in consumer or commercial applications.   Frenetic development of large format, lithium ion batteries, as well as small, super-clean internal combustion engines, suggest that the next three-to-five years will see further encroachment of mainstream turf by a wide range of small, task-oriented vehicles.

Implications for U.S. Industrial/Utility Industry

The increasing sophistication and overall manufacturing capabilities of Chinese and other Asian parts and accessory companies are two-fold.  First, there is the competitive aspect of keeping up with industry cost structures and trends in cost-quality trade-offs.  This alone makes sourcing abroad, if not a priority, something to seriously consider.  Second, if the vision of the industry here in the United States is one of innovation and market expansion, it is critical to have the productive capacity to serve those expanding opportunities. 

Much of this expansion is likely to be fueled, not by large companies with locked-in interests, but rather by small-to-midsize firms or more entrepreneurial divisions of large firms.  Capital to finance new, innovative plant and equipment will be scarce and difficult to come by.  Thus, the new capacity may well come from abroad, China in particular.  More about this in the concluding paragraph of this article.

Parts and Components Sourcing Underpins the STOV Phenomenon

Another aspect of small vehicles is the ready availability of parts and components as supplied by a host of specialized manufacturers, producing everything from batteries to wheels, tires, brakes, differentials, transmissions, steering, suspensions, molded body parts, and electric motor control systems—as well as the nuts, bolts, cables, etc. of the micro service dimension.

The sourcing of these parts and components has clearly become global and a significant source is China.  China’s exports of auto parts to the United States increased from approximately $1.2 billion in 2002 to $4.3 billion in 2006, an increase of almost 3.5 times the 2002 figure in the four year period.

Korea also has had substantial growth.  In 2002, Korea exported $752 million of auto parts to the United States.  Trade volume has grown steadily, reaching $2.2 billion in 2006.  Brazil has also shown significant increases from the $538 million level in 2002, climbing to over $1.0 billion in 2006.

Not surprisingly, the Asian (and world) leader in auto parts exports to the United States is Japan, with $12.5 billion in 2006.  On the other hand, there has been very little growth in Japanese yearly totals.

Exports of parts and components for utility/industrial vehicles and the somewhat more encompassing category of small, task-oriented vehicles are, of course, a much smaller volume than those destined for mainstream automobiles.  Unfortunately, trade statistics are not sufficiently disaggregated to get a cut-and-dried figure for parts and components for STOVs alone.  What the overall figures do indicate, however, is the growing capacity of China to produce these items.  These capabilities were clearly on display at the Hong Kong Auto Parts Fair, details of which are set forth below.

 

Estimate of the STOV Parts and Components Market in the United States

Benchmarking via data the U.S. Census of Manufacturers and the Annual Survey of Manufacturers, shows a clear upward trend in parts and components manufacturing over the past ten years.  Not only has there been a major increase in the value of parts and components, but there has been marked increase in the ratio of these products to the value of STOVs.  That is, parts and components are becoming more and more important in generating revenue in comparison to current STOV production.

In 1997 parts and components were about $120 million in shipments.  By 2002, dollar volume had doubled to $240 million.  It is estimated that in 2006 shipment value had reached over $330 million. 

The fact that this growth has outpaced the gains in STOV revenues is not surprising as the pool, or stock, of STOVs has increased over the years.  Currently, the stock of STOVs is estimated to be in excess of 3 million units.  Doing a very rough estimate of imported parts and components by taking the ratio of existing STOV units to outstanding automobiles in the United States (approximately 150 million), and applying this ratio to the $4.3 billion of total Chinese auto parts and components exports to the United States, results in about $85 million.  (This is probably a conservative estimate in that it includes China alone and would not reflect imports from Japan, Korea, and Taiwan.)  Thus, it is quite likely that STOV parts and components market in the United States exceeded $400 million in 2006.

Auto Parts Fair Reveals Wide Breadth of Manufacturing Capabilities

The Hong Kong Auto Parts Fair revealed a wide breadth of manufacturing capabilities.  The Fair featured the products of 263 exhibitors, of which 90 were local Hong Kong companies and 173 from other countries or regions.  With 145 exhibitors, mainland China had by far the largest geographic representation.  The Fair attracted over 6,500 buyers, the majority of which (55%) came from outside Hong Kong.

Among the non-Hong Kong buyers/visitors, mainland China had the greatest number of attendees, 1,243, or a little over one-third of the total.  Significant representation outside of Asia included the United States with 266 and Canada with 113.  Mexico had 51 buyers/visitors, so NAFTA altogether had a respectable 430.  The European Union had slightly more, 458.
 

Role of International Trade Fairs:  Opportunity to Change and Broaden the Market

International trade fairs in just a few days provide an opportunity to get a first-hand look at what is available on the worldwide market (or a large regional market).  It is an opportunity to view, inspect, and possibly purchase; an opportunity to make many business contacts quickly, in a short period of time; and assess the potential for exhibiting to expand business in a new direction.  The Hong Kong International Auto Parts Fair was no exception in this regard.

Industrial companies (as opposed to companies focused on consumer markets) ignore the fact that China, and Asia in general, offers significant potential markets.  It is not just a low-cost production base. To the management of some companies, of course, this is preaching to the choir, but to others it is yet an untried notion.

Diversity of Exhibited Products

The breadth of China’s auto parts and accessory product capabilities was clearly on display at the Fair.  Exhibitors were grouped into 36 different categories from air conditioners to automotive glass, brake systems, electrical systems, steering and suspension systems, exhaust systems, and transmissions, among many others. There were 10 manufacturers of air conditioners, 15 of electrical systems, and 26 engine component companies—a small sample cited to indicate the depth, as well as breadth of participating companies.

There are several implications arising from this significant range and depth of company representation:  First, the auto parts industry is China is highly competitive, which indicates that not only price is likely to be a favorable factor, but quality and service as well, as these are often complementary characteristics of competitive industries.  Second, the industry segments are broad enough and sufficiently specialized to provide latitude for choice and selection of suppliers.  Finally, many of the major companies represented at the Fair are diversified into a range of products, not just auto parts and accessories, which translates into balanced, sustainable growth over the course of the business cycle.  An example of such a company is SMT, Ltd.

Leading Companies Looking for Significant Growth

Several companies can be cited as leaders in their field.  Surface Mount Technology (Holdings) Limited (SMT), for example, is a rapidly growing electronics components company.  The firm is headquartered in Hong Kong and is listed on the Singapore stock exchange.  The company currently has three plants in China with two new plants to be added by the end of this year.

The three plants have a total production area of approximately 82,000 square meters which houses 137 SMT production lines and employs more than 11,000 employees.  With the completion of the new plants, production space will grow to 105,000 square meters, an increase of almost 30%.  Employment will grow commensurately.

SMT’s growth has been guided by Professor Chan Kei Biu, a dynamic businessman, who founded the company in 1986.  Fourteen years later, SMT’s revenues exceeded $113 million and since 2001 have grown at an average annual compound rate of 16.6%, reaching $332.2 million in 2006.  If SMT maintains this rate of growth in 2007, revenues will come close to $390 million. 

SMT’s principal business is providing electronics manufacturing services (EMS), and as such has become a source of a wide range of OEM electronics products, including data storage products, LCD monitors, smartcard readers, electronic price label readers, as well as a growing product line in automotive electronics.  One of the company’s major efforts has been in printed circuit board production for automotive consumer electronics, and lists well-known Japanese automotive consumer electronics companies, such as Clarion, Sony, and Pioneer among its principal customers.  Korean giants Samsung and LG are also customers.

Providing assembly technologies from SMT and flip-chip bonding to manual insertion, Professor Chan has been able to flexibly provide services which underlie numerous product segments.  As a result, over 50% of SMT revenues come from Japan, 19% from Korea, and another 16% from North America and Europe.  Presently, only 12% of revenues come from sales in the Peoples’ Republic of China (PRC) and other Asian countries.  In coming years, this geographic distribution of revenues is destined to change:  Now Chan and his company are aiming to take advantage of China’s ambitious plans automobile production expansion.

Plastics Plating Company Follows Path of Diversification

The Jing Mei Group of Companies has followed a similar pattern of development, founded in Hong Kong (in 1968) by Mr. Chan Lai Shun, now company Chairman, and spreading into neighboring Guangzhou Province, where its plant is located.  The company began operations electroplating of plastic resin products.  It is now vertically-integrated into injection molding, thus assuring quality control throughout the production process to finished product.

Jing Mei products now cover a diverse range of markets, including kitchen and bath products, components of home appliances, shaving items, and telecommunications equipment, and automotive pieces, such as handle assemblies. 

In anticipation of the rapid growth of the auto industry, Jing Mei created a new business unit in 1998 specifically oriented to that market and under the direction of Mr. Ricky Chan.

Automotive parts include exterior trim for wheels, body, doors, lighting, and radiator grills; interior trim such as instrument panels, door trim, gear shift decoration and glove boxes.

Services for automotive parts customers, as well as other product areas, include design, prototype development, pilot production, and volume production and delivery services (including display packaging).  Jing Mei Automotive takes on both original design manufacture (ODM) and finishing of components and parts supplied by others.

What Is Driving The Auto Parts Industry?

The question of what is pushing the Chinese auto parts industry to new heights is easy to answer:  The spectacular growth of China-based automobile production.  In 2006, according to China’s Association of Automobile Manufacturers, unit production exceeded seven million units, growing at an average annual compound rate of 25% since 2001, when 2.3 million units were produced.  By 2012, Chinese auto production will be in the range of 12-14 million units.

The auto parts industry has been growing apace, virtually doubling from $36.2 billion in 2003 to an estimated $77 billion in 2006.  The auto electronics segment alone has increased from $4.3 billion to and estimated $10 billion in 2006.

China’s Regional Automobile Industry Development

Unlike the automotive production centers in the United States, which tend to be clustered in the North Central Census District, China’s automotive industry is spread out on a north-south axis in four major regions in the eastern segment of the country.  These regions are, from north-to-south, Northeast, Bohai, the Yangtze River Delta, and the Pan-Pearl River Delta.

Each of these regions has representation from some of the world’s largest automobile manufacturers, such as General Motors, DaimlerChrysler, Toyota, and Honda—along with Chinese counterparts.

Regional Automobile Manufacturing Centers in China, 2005

Region	2005 Unit  Production	Major Manufacturers
Northeast	394,500	First Automobile Work (FAW) Group, VW, Toyota
Bohai	673,500	Beijing Automotive Industry, Geely, Brilliance, DaimlerChrysler, Hyundai, BMW, GM, Toyota
Yangtze River Delta	704,600	Shanghai Automotive Industry, GM,  VW, Fiat, Mazda
Pan-Pearl River Delta	580,800	Guangzhou Automobile Group, Toyota, Honda, Nissan, Mazda

Source: China Statistical Department

Supportive industries will align with regional production centers

Having established the regional auto centers, it is very likely that the parts industry will also align itself accordingly.  SMT’s new plants, for example, are in the Northeast and Bohai regions.  The benefits to Chinese regional development are enhanced by the fact that many companies supporting the auto industry will also be producing products for other industries, as in the examples of SMT and the Jing Mei Group.

A Win-Win Expansion Paradigm:  A U.S.-Based Company in China

One company exhibiting at the Hong Kong Auto Parts Fair, Century Mold Asia Company, Ltd., has an interesting history, suggesting a win-win situation for both Chinese and U.S. stakeholders.  Century Mold makes a wide variety of molded parts for the auto industry in the United States.  The company, based in Rochester, NY, was struggling to keep up with competitors in the U.S. market.  Northern New York has lost a considerable amount of its manufacturing and agricultural base over the years and for a while it looked like yet another company would close or pull up stakes.

Instead, Century teamed with Global Technology in a joint venture that resulted in setting up a China-based manufacturing plant, while at the same time expanding its facilities in Rochester through a Rochester County development loan.  Global Technology is a company that specializes in establishing Asian manufacturing facilities.  The firm evaluates the feasibility of locating in China, bridges cultural gaps with personnel fluent in Cantonese, Mandarin, and English, and implements and monitors quality control, packaging, international shipping, and customs and import/export licensing procedures.

Once Around the Exhibition Floor

As noted, the variety of parts and accessory companies exhibiting at the Fair was impressive.  Some examples follow.

Kingone Industrial Co., Ltd.—Kingone specializes in light-to-heavy duty winches.  Winches are designed for mounting on vehicles from heavy duty pickup trucks to ATVs

China Zhersn Auto Parts Co, Ltd.—Headquartered in Guangzhou, China, China Zhersn manufactures automobile GPS navigation systems, two-way alarm units, audio amplifiers, and video systems.  The company produces a full line of integrated DVD/audio systems.  The company also produces high intensity xenon lights and rear view sensors and displays.

Ekpac Taiwan Limited—Based in Taipei, Ekpac manufactures and distributes a wide range of auto parts including lighting components, brake pads, windshield wipers, rear view mirrors, and a host of other products.

Ekpac autoparts: RV mirror, alternator, taillight assembly

Ekpac was founded in 1964 and opened its automotive parts line 20 years later.  The company ships product around the world, including to U.S. and U.K. markets.  Most of its products are high quality, ISO9000 replacement parts and components.

Manson Engineering Industrial, Ltd.—Headquartered in Hong Kong with its manufacturing plant in Guandong Province, Manson is a major manufacturer of power electronics products.  The company’s product line includes linear DC regulated power supplies, switching mode power supplies, DC-DC converters, DC-AC inverters, battery chargers, power transformers and PC board assemblies.

Manson is in the process of incorporating purchasing and manufacturing procedures which conform to the Restrictions on Hazardous Substances (RoHS) Directive, as issued by the Chinese government.  To that end the company has installed its first lead-free soldering equipment and is screening suppliers for listed substances.

YLE Relay (Yonglin Electron Electrical Equip Co., Ltd.)—Located in the city of Ningbo, YLE manufactures power relays, automotive relays, signal transmitters, car security systems, and central locking systems.

JVJ headrest video system	JVJ roof-mounted LCD video system

JVJ Guangzhou Electronics Co., Ltd.—JVJ is located in the Huadu District of Guangzhou City.  Although the company was only recently incorporated (2001), it is growing rapidly and now has over 360 workers, including professional personnel.  The company manufactures a wide array of automobile audio-video equipment, as well as GPS systems.  JVJ specializes in audio-video systems that are specially constructed to be mounted in vehicle dashboards, headrests, roof, and visors.  Most systems are multi-compatible, accommodating DVD, CD, MP3, Kodak Picture CD, and other consumer electronics protocols and standards.

According to company information, JVJ has a current annual output of one-half million LCD products and revenues exceeding $10 million.  JVJ is, however, in the process of relocating to Auto City in the Huadu District and will establish new offices and plant contiguous to the Nissan Auto Group.  Its plans call for doubling production and increasing its staff to 200 R & D personnel and more than 1,000 assembly line workers.  The company expects revenues to exceed $100 million. 

Minpn (Fuzhou Minpn Electronic Technology Co., Ltd.)—Minpn Electronic Science and Technology Co., Ltd. is located in Fuzhou Jinshan Industrial District.  The company focuses on the development, manufacture and export of auto electronic products.  The company’s innovative products include a parking assistant system featuring a vocal warning and guidance system, and a heads-up speedometer device (HUD) that projects vehicle speed on the windshield so that the driver can maintain eye contact with road conditions.

Shenzhen CSG Automotive Glass Co., Ltd.—CSG is the largest glass manufacturer in China, with a wide range of glass products.  CSG Automotive was established in 1994.  The company has imported the latest European and Japanese technology in auto windshield manufacturing and holds to rigorous quality standards, according to company literature.  CSG is an OEM supplier to more than 20 vehicle models such as Nissan and Toyota.

Sur-Normdom Auto Parts Co., Ltd.—Sur-Normdom produces aluminum wheels of all sizes, designs and finishes.  Located in Sanshui District, Foshan City, Sur-Normdom was founded in 2005 and is a joint venture partner in a $30 million investment to support and advance China’s auto industry.  The company specializes in the production of aluminum alloy wheels, and currently produces some 2 million units annually.  While Sur-Normdom will be a major supplier to the Chinese automobile industry, it also is developing export markets around the world.

Rui’an Lotuce Autoparts Co., Ltd.—Lotuce is a major supplier of windshield wipers, windshield wiper motors, heater motors, and window lift assemblies. Based in Ruian City, Zhejiang, the company provides and integrates research and development, prototype design, and manufacturing.

International Market Development:  How U.S. Companies Fit In

The history of international market development can be sketched out in terms of a series of manufacturing and market transitions.  Typically, new industries initially grow up in developed countries with the human and capital resources to promote growth and expansion.  As the industry and the initial markets mature, production shifts to low cost locations either within a country or abroad.  Eventually, income generated in the new manufacturing centers results in significant local, consumer-driven markets.

Where does this process leave the original, developed country industry?  Certainly it is less of a manufacturing base, as the workforce shifts into service industries.  However, given the proper incentives (largely controlled by politicians), a free market, developed economy becomes the on-going source of innovation and product development.  Such countries do not lose their advantages in research and development, in prototype development, the manufacture of dramatically different products, quality control, and the ability to derive significant income through the commercial exploitation of new ideas and concepts.

The U.S.-based small, task-oriented vehicle industry appears to be on the edge of transition in a number of ways.  Not only does the domestic market offer considerable potential, but STOV firms are currently the source of new technology, applied innovation, and quality standards.  These advantages will continue (and provide continuity to the industry) notwithstanding trends in Asia-based manufacturing.  In fact, as noted, U.S.-based firms could well integrate the advantages of China into their overall development strategies.