Foreign automakers shifting focus - Localization for parts and quality improvement

[Marc]

From Asia Times Online:

Foreign automakers shifting focus

BEIJING - Following rapid expansions in production capacity over the past several years, transnational automakers in China have greatly reduced their investment in new assembly plants and begun to shift their investment focus to improving the profitability of existing facilities.

Recently, Volkswagen announced that it will not direct any investment into expanding production capacity for the near term, but will continue to expand the scale of localization for engine assemblies and other auto accessories and parts. According to a report by China Auto News, the majority of transnational automakers in China worked out their production expansion plans in 2004, and some have made it clear that they will only expand their production capacity in the future in accordance with market demand.

General Motors (GM), Honda Motor and other transnational automakers also have no new plans to expand their production capacity in China in 2005. With official operation of the production facilities for complete vehicles and key parts in Shanghai, Shenyang and Yantai, the total production capacity of Shanghai GM will reach 480,000 units per year. GM expects this capacity to be sufficient for some time to come. Honda, whose production capacity will also soon reach 480,000 units, has not made public any plan to further expand its production capacity.

In addition, Beijing Hyundai, Changan Ford, Nissan, Peugeot and Citroen have announced expansions or readjustments of their production capacity in China last year or early this year. Given this increasing supply of vehicles on the domestic market, it is natural that transnational automakers would reduce their investment in assembly plants and focus new investments on cost reduction, while simultaneously improving the economic performance of existing investments, and improving customer services.

Accordingly, industry experts expect further investments of transnational automakers in China to go into the localization of auto accessories and parts, so as to reduce the production cost of finished vehicles. In addition, investments are expected in auto financing services, which provide credit for the purchase of auto products, and to logistics supply chains. Some transnational automakers also are investing in their marketing channels and service networks in China. For instance, Volkswagen has set up its Volkswagen (Beijing) Center to support dealers across the country and provide service for imported Volkswagen cars.

Industry insiders note that the major factors causing transnational automakers to readjust their investment focus in China include:

# The changing supply/demand situation in the domestic vehicle market. In general, when supply exceeds demand for a specific product, investments will focus on improving the productivity and profitability of existing production facilities, not on building up additional production capacity. Because the supply of vehicles in China arguably exceeds demand at the present time, many transnational automakers in China have responded by making greater efforts to localize the production of auto parts, strengthen their research and development capacity, and improve their marketing efforts.

# The maturing of Chinese customers. Auto customers now have higher expectations of automakers with regard to their products, prices and services.

# Changes in the competitive environment. With the fiercer competition between foreign and domestic automakers, the focus has shifted from competing on output and price to competing on the basis of brand, quality and service. So for the years to come, the prime task for automakers will be to build up the value of their brands, improve product quality and perfect their marketing and service systems.