Cost of Shipping and Material Reduce China’s Advantage

Parts from China may start with an advantage, but material and transportation costs negate much of it, a conference on China heard.
Senior supplier executives described those headaches last week during a panel discussion at the Automotive News China Congress. Approximately 250 industry executives attended the event, reported Automotive News.
General Motor s, Ford Motor Co. and others have begun to import Chinese-made parts for use in North America. And Honda Motor Co. plans to export Chinese-made Jazz subcompacts to Europe. But China will not become a major parts exporter in the near future.
“The fact is, there are very few parts produced in China today that are globally competitive,” said GM China CEO Phil Murtaugh. “China suppliers produce very high-quality parts, but it costs them a lot to do that.”
Doubts about China’s competitiveness come at a time when automakers are pressuring suppliers to build factories there. For example, Delphi Corp. has built a network of Chinese factories that generate sales of $650 million per year. Exports account for 20 percent of those sales.
One of Delphi’s customers is General Motors. By 2009, the automaker wants to purchase $4 billion worth of Chinese parts each year for use in GM plants outside China.
Meanwhile, Ford’s North American operation plans to import $1 billion worth of parts each year from China and other emerging markets. But Ford has had trouble finding enough suitable suppliers in China.
Part of the problem is that China lacks adequate access to high-quality raw materials – especially steel, plastics and paint.
That pushes automakers and suppliers to import raw materials. For example, Dongfeng Motor Co. imports high-strength steel and heat-resistant plastics, says CEO Katsumi Nakamura.
“Energy costs are lower, and labor costs are lower, but raw materials are higher,” Nakamura said.
Shipping costs also are much higher than in developed countries. China’s transportation infrastructure is woefully underdeveloped, said panelist Jinya Chen, president of Delphi China.
Because of poor roads, lack of good information technology and bureaucratic roadblocks, the cost of shipping goods 900 miles from Chengdu to Shanghai matches the cost of shipping them from Shanghai to Long Beach, Calif., Chen said.
Protection of intellectual property rights is another hurdle. International suppliers fear that Chinese suppliers will produce cheap knockoffs of their parts. Delphi is “ruthless” in its prosecution of counterfeiters, Chen said.
Chen predicted that enforcement of intellectual property rights will improve over the next five years as the World Trade Organization forces China’s government to enforce anti-counterfeiting laws. Other panelists were skeptical.
“I would say, ‘Let’s wait and see,’ ” said panelist Peter Pang, president of Bosch (China) Investment Ltd.
Chinese suppliers can produce inexpensive castings and stampings, but domestic Chinese factories often tend to be inefficient. Therefore, only certain components produced in China are truly cheap, said Steve Meszaros, general manager of Yanfeng Visteon Automotive Trim Systems Co. Ltd.
After listening to a speech by the head of an American-owned supplier who said Chinese parts are the cheapest, Meszaros took the executive aside and told him: “I don’t know what you’re talking about. They certainly aren’t cheaper in my business.”