China auto parts in M&A drive to move up value chain

Updated: 2010-08-02 14:38
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Most Chinese parts firms currently lack the size to foot it on the global stage.

Seven of China's 10 biggest component makers are foreign companies, and about 70 percent of the country's $160 billion auto supply market is occupied by foreign or joint ventures.

Of the three Chinese firms in the top 10, all are units of the country's leading automakers -- SAIC Motor Corp, FAW Group and Dongfeng Motor, KPMG said. Most of those specialize in lower-end parts.

"The market is becoming so significant, so large and the auto supply industry is lagging a little bit behind in terms of building the necessary size and scale," said Ivo Naumann, managing director of business advisory firm AlixPartners.

Global leader Bosch posted revenues of nearly $50 billion in 2009, even as few independent players in China logged sales of more than $1 billion.

Chinese players may need to make significant investments, both organically and through acquisitions, as quality and emission standards rise and they chase higher margin businesses.

As they do so, they will face a number of challenges, most notably costs that are already rising at home and could rise even further with the acquisition of expensive foreign operations.

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A wave of strikes in auto parts factories recently in China by workers seeking better pay and working conditions have already begun lifting costs across the board.

Rising raw material costs, which account for 50-60 percent of total cost, versus 4-12 percent for labor, will also pressure margins, analysts said.

The lack of experience in managing multinational companies could also pose a challenge, as evidenced by a string of failures in major overseas M&A by Chinese firms like SAIC, which bought control of Korean carmaker Ssangyong, only to see it go bankrupt.

"It is one thing you execute the deal and another thing to successfully manage the company," said AlixPartners' Naumann.

If they look abroad, Chinese firms may have to act fast as bargains could soon disappear with a global recovery.

"This window that is open for deals now is not going to open forever because in the United States there is certain recovery in the auto industry," Naumann said.

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