TORONTO -- Tesma International, a Canadian parts supplier, said on Wednesday it would build an incubator plant in China next year that will start shipping parts by 2006.
Tesma, which makes engine, transmission and fuel system components, said it had identified a location for the facility, which should be in full production in 2008 or 2009. It did not provide specific details on cost, volumes or location.
Incubator plants, small facilities capable of making more than one product, enable companies to make cautious forays into new areas without the costs of larger, dedicated plants.
"It is intended that spin-offs into independent divisions will occur as we continue to develop critical mass in various product areas," Tesma chief financial officer Anthony Dobranowski said on a conference call.
Tesma, one of the Magna International group of companies, already has a plant in South Korea.
Dobranowski said capital spending on the project would range between $10 million and $12 million each year over the next three years. The facility is expected to be running by the second quarter of 2005 "at the latest" he said.
Analyst MacMurray Whale at National Bank Financial said the time was ripe for such a venture.
"Chinese industrial capabilities have gotten so good that it's a question of time before they figure it out and do it themselves," he said. "So I think it's probably the right time for these Canadian suppliers to go over there and start getting some capacity on the ground."
On Tuesday, Tesma posted sturdy second-quarter profits that were also boosted by tax loss benefits but it said rising steel prices and surcharges are slowing near-term profit growth and hampering its North American units.
"It's obviously been a hit (on margins)," said Dobranowski, adding if there is no relief, the company will try, in some cases, to replace steel with other materials.
Unable to pass those costs on to its customers, who are pressuring suppliers to cut prices, the company said it plans to keep cutting its own costs.
Lower production levels at Tesma's biggest customer, General Motors, has also added to the tougher conditions it faces in North America.
Production volumes by the Big Three carmakers was down 4 percent in the quarter, Tesma said, as they grappled with gains by U.S.-based foreign automakers. GM's volume reductions came in key engine programs that are crucial for Tesma.