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Muddled auto mart muffles Fuyao
By Wang Yu and Ye Jianping (China Business Weekly)
Updated: 2004-09-03 15:06

When the city gate is on fire, the fish in the moat will suffer.

The old Chinese saying seems to be proved right with meagre sales prospects hassling car manufacturers also muffling part suppliers' businesses.

Fuyao Glass Industry Group Co Ltd, the largest vehicle glass manufacturer in China, has just laid off more than 1,000 employees.

Although company helmsman Cao Dewang, chief executive officer of Fuyao, has denied any link between the current market circumstances and the firm's move, experts are still in doubt.

"The large-scale laying off of staff surely has a close connection with the choking up of automotive sales," said Z S Jones, executive managing director of Shanghai WP Automotive Consultancy Co Ltd.

As a major local auto glass supplier, Fuyao holds about half of the domestic market share.

"How can such a market leader prove immune when car sales growth is losing the steam to drive forward," Jones said.

In the current market circumstances, there are no other options for part suppliers like Fuyao to choose, but to give up staff.

"They have to do that to keep costs under control to go through this difficult period," Jones said.

For Fuyao, a non-high-tech company, it is not necessary to keep employees on in lean times, Jones said.

"The auto glass industry is different from the high-tech-oriented one, which requires well-trained staff and technicians. Fuyao can easily rehire staff when the industry recovers," Jones said.

In times of recession, a lot of firms simply sack employees until the difficulties are over, while others cut pay but keep them on.

Xie Wei, a senior auto analyst with the China National Automotive Industry Consulting and Development Corp (CNAICD), disagreed, saying Fuyao's latest move could have something to do with the current slowing auto sales momentum, but the root lies with the firm's plans to shift strategies.

"The move is more out of Fuyao's own strategic consideration. Although car sales growth is braking, there is still a huge demand for glass from the auto maintenance and repair business. Actually this sector contributes to two thirds of auto glass consumption," Xie said.

Xie said Fuyao's actions were attempting to make way for higher technology and more efficient production techniques.

"To enhance the company's core competence and to lower costs, it is necessary to have a lean labour force. More advanced production technology and facilities do not require as many workers," he said.

Fuyao has been shifting its manufacturing capacity to South-eastern countries and Russia in recent years.

Xie said the move could aim to take full advantage of overseas technology and research and development capability, and come closer to international customers.

"The capacity shift may be related to laying off staff in the Chinese market," Xie said.

Fuyao started laying off its workers in early August, and had wrapped up the move by August 10. There were up to 1,000 employees involved, accounting for 16 per cent of the firm's 6,000 staff in China.

"We have to cut down the number of administrative personnel and redundant staff to enhance our competitive edge," Cao Dewang, chief executive officer of Fuyao, was quoted by the 21st Century Economic Herald as saying.

"The move doesn't mirror the downturn of the domestic auto market," Cao stressed.

According to Fuyao's half-year revenue report of 2004, released last week, the company's net profits have shot up by 41 per cent year-on-year, amounting to 199.5 million yuan (US$24.04 million).

The total staff payment expenditure of the firm is about 118.81 million yuan (US$14.31 million) per year.

The job cuts could save the company about 700,000-800,000 (US$84,643-US$96,735) a month.

Despite being a market leader, Fuyao has been constantly confronted with more severe challenges.

Saint-Gobain Co Ltd, one of the world's leading glass makers, was regarded as an arch rival against Fuyao in the Chinese market.

"Compared with Saint-Gobain, Fuyao lacks advanced technology and sufficient capital support," an unnamed employee of Fuyao said.

Foreign auto glass manufacturers have also adopted a localized strategy, which boosts their competitiveness in terms of price.

That is why Fuyao should take measures such as cutting jobs, Jones said.As auto glass production surges, supply will gradually exceed demand, experts predicted at a meeting hosted by the China Architectural and Industrial Glass Association.

When car sales slow down and auto production decreases, orders from car manufacturers drop correspondingly, an even gloomier sign for suppliers' businesses.

Fuyao has been co-operating with some auto manufacturers like Shanghai Volkswagen Co Ltd for a long time.

But they also announced recently that they were cutting superfluous production costs. Fuyao's other clients will also shrink their production.

"An auto manufacturer in the southern China region will cut its production from 10,000 to 3,000, and another one in Southwest China will trim production by half," an official from Fuyao said.

China's car sales rose by just 1.6 per cent in July from June to snap a three-month decline. Growth is expected to slow to just 10-20 per cent this year after nearly doubling to 2 million units in 2003.

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