As yuan rises, so do prices of Chinese parts

Shanghai, China - Rising costs, including labour, have eroded China's status as a low-cost source of components for foreign automakers and suppliers.

Now suppliers also must deal with a rising yuan. The yuan's rise means foreign companies must pay more in dollars or other currencies to buy Chinese parts and materials.

The yuan - long pegged to the US dollar at around 8.3 to the dollar - was allowed to float in limited steps against the dollar in July 2005. On March 18, one dollar traded for 7.1 yuan, which means the yuan has appreciated 16.8 percent in almost three years.

Still, China will remain an inexpensive source of parts for use in operations worldwide, say automotive executives. They hope that helping Chinese suppliers become more efficient will offset some of the cost increase.

In 2007, China shipped auto parts worth $8.53 billion to the United States, up 23.1 percent from 2006, according to federal government figures.

Less attractive

The yuan's appreciation "will make China look less attractive," says Chris Obey, managing director of China for Lear Corp. But "we're still going to pursue (sourcing) aggressively."

Lear, of suburban Detroit, produces seats, door panels, acoustic systems and electronic distribution systems. The supplier is in the early stages of sourcing parts from China for use worldwide, says Obey.

The yuan's rapid rise surprised some companies. Nissan buys parts in China for export to overseas plants, says Lu Hong, finance director at Nissan (China) Investment Co.

"We were assuming the yuan would not appreciate at this rate," she says. "Four years ago, we thought it may appreciate around this level in five or 10 years."

European companies are in a slightly better position than U.S. companies because the euro has not lost value as quickly as the dollar. Still, Europeans are keeping a close eye on the currency.

"This won't have an impact in 2008, but it is something to monitor," says Christian Marsais, group vice president in charge of China at Valeo SA. Valeo, of Paris, produces electrical and thermal systems, transmissions, wiper systems and security systems.

Valeo's goal is for 70 percent of its purchasing to come from low-cost countries by 2010, CEO Thierry Morin has said. China figures prominently in that plan.

Cure: Efficiency

Foreign companies hope to offset some of the impact of the appreciation by helping Chinese suppliers become more efficient.

Magna International Inc. will boost sourcing from China 65 percent this year to $500 million, says Keith Lomason, managing director of China. Magna, of Toronto, produces seats, mirrors, body and chassis systems, closures, powertrain components and other parts.

"We are working with our suppliers on efficiencies," says Lomason. "So far we have been able to offset the yuan appreciation with efficiency improvements."

From Automotive News (A Crain publication)