Despite slowdown, suppliers bet on China

By Charles Child Crain staff (AN)

Beijing - Global suppliers, attracted by stunning growth prospects, are shrugging off this year's slowdown in auto sales in China and investing heavily in the world's largest auto market.

Continental AG, for instance, plans to hire 5,000 workers in China by year end. It has 16,000 now.

Magna International Inc., too, is all in. In 2014, the company plans to operate 28 plants in China, eight more than now. In 2001, Magna had just one plant in the country.

In a global industry still recovering from the Great Recession, China offers near-certain prospects for robust growth.

Because a growing number of autos are built on global platforms, suppliers can gear up swiftly in China by producing the same parts that they make elsewhere.

But suppliers must be nimble, for example, to work with powerful government officials in China and help domestic automakers fill gaps in engineering expertise.

China's central government decreed in the first quarter that government officials must buy vehicles from domestic automakers. That's bad news for Audi, the brand of choice for officials, but possibly good news for suppliers, such as Magna and Johnson Controls Inc., that can provide elaborate rear seating areas preferred by chauffeur-driven officials.

Growth in China highlighted a good 2011 for suppliers. In the Automotive News list of the top 100 global suppliers, 68 posted double-digit gains from 2010, driven in part by North America's rebound from the recession. The only troubled group in the top 100 was Japanese suppliers, who endured a slump caused by the March 11 earthquake.

Growth projections in China are compelling. Analysts and industry executives expect light-vehicle sales to reach 30 million by 2020, more than double the 14.5 million sold in 2011.

In other words, in eight years China's auto market is tracking to match the size of today's European and U.S. markets combined.

As they plan ahead, the suppliers are unmoved by the sales slowdown in China. In the first four months of this year, sales of passenger vehicles rose just 2 percent, according to the China Association of Automobile Manufacturers.

BorgWarner CEO Tim Manganello expects his business in China, which accounts for about 6 percent of company sales, to grow an average of 30 percent per year over the next five years. BorgWarner's global sales last year were $7.11 billion.

The company devised a creative strategy to produce transmission parts in China that illustrates the importance of central-government policy-makers there.

In 2008, the company advised the government on the best transmissions for the country's rapidly developing industry. The result was a joint venture signed in 2009 between BorgWarner and 12 Chinese automakers called BorgWarner United Transmission Systems Co. to produce BorgWarner clutch modules and control modules for dual-clutch transmissions.

The joint venture plans to start production this year.

BorgWarner, No. 27 on the list, produces turbochargers, clutch modules, variable-valve timing mechanisms, transfer cases and other powertrain parts.

Meanwhile, BorgWarner's turbocharger rival Honeywell, No. 58 on the list, plans a second turbo plant in China that will start production early next year. Total annual turbo capacity in China will be 2.5 million units.

Honeywell's r&d center in Shanghai has about 1,000 engineers.

Engineering cooperation

Johnson Controls Power Solutions, which produces lead-acid and lithium ion batteries, is investing more than $1 billion to boost manufacturing capacity in China.

It expects to produce about 17 million batteries this year and as many as 30 million in 2017 -- about 70 percent for the aftermarket and 30 percent for automakers. None of the batteries will be exported, the company says.

Kim Metcalf-Kupres, vice president of global strategy for the unit of parent Johnson Controls, predicts China in 2020 will be the largest market for auto batteries, and thus her company's largest opportunity. North America is the largest market now.

Parent Johnson Controls, No. 7 on the global list, also produces seats, complete interiors, interior electronics and other parts.

Metcalf-Kupres says domestic automakers typically need little engineering assistance to adapt standard lead-acid batteries to their vehicles.

But it's a different story for fuel-saving stop-start technology, in which advanced lead-acid batteries, called absorbed glass-mat batteries, work with sensors and other devices to stop the engine, say, at stoplights.

Johnson Controls engineers typically work closely with engineers at Chinese domestic automakers in China to integrate the technology into their cars, Metcalf-Kupres said.

Soft buttons for China

Magna, No. 4 on the global list of top 100 suppliers, expects its sales in China to double from last year to about $1.5 billion in 2014. Magna produces a vast range of parts, including seats, body and chassis parts, electronics, and electric systems.

Chinese consumers are increasingly aware of -- and want -- the advanced technology that automakers are lavishing on autos sold in Europe and the United States, such as navigation, clean diesels and stop-start technology.

Continental, No. 3 on the global list, says it is marshaling products and services to address four important trends in China -- safety, the environment, information and affordability -- that would be right at home in any fully developed market.

But Chinese shoppers still have preferences, and global suppliers operate many technical centers there to modify global autos for local tastes.

For instance, Germans prefer hard and precise-feeling buttons and controls, while Chinese prefer soft buttons, says Frank O'Brien, executive vice president of Magna's Asia Pacific region.

Denso's high-tech approach

Toyota-affiliated Denso Corp., Japan's biggest auto parts supplier, is beefing up r&d in China to meet surging demand.

In April, Denso, No. 2 on the global list, said it will spend ¥7.2 billion, or about $91.5 million, to open a larger technical center in Shanghai in June 2013 and double the size of its local engineering team to 500 people by 2016. The new tech center will get a wind tunnel.

The Japanese supplier is also field-testing some of its more advanced technology there.

In March, it began trials of its vehicle-to-vehicle and vehicle-to-infrastructure wireless communication system. The technology, already being tested in the United States and Japan, aims to minimise congestion and accidents, two big problems on China's roads.

Denso has 22 production companies in China making such products as air-conditioning systems, engine control components, fuel injection components, alternators, starters and car navigation systems. It also has a local software engineering unit.

From Automotive News (A Crain publication)