SHANGHAI -- European and US suppliers are still rushing to China, driven by low manufacturing costs and the country's vast potential.
But auto partsmakers are entering a more competitive marketplace than just a year ago. A shakeout of suppliers in China is inevitable, say executives and consultants.
Within five years, "more than 20 percent of suppliers" will fail, Keith Lomason, executive director of Magna International's office in China, said at the Automotive News China Conference here.
The shakeout will increase risks for suppliers entering China. Until now, the rapidly expanding market absorbed nearly all parts produced in the country.
Now competition is creating a vicious cycle, prompting partsmakers already here to seek export opportunities. That is likely to further lower global parts prices and in turn pressure Western suppliers to move to China.
"There is increasingly intense price pressure," said Rudolf Colm, board member in charge of Asia-Pacific for supplier Robert Bosch of Germany.
The booming unit-sales growth here has slowed from a 67 percent surge to 2 million units between 2002 and 2003 to a 15 percent increase to 2.3 million last year.
Analysts say sales this year will grow only about 10 percent, perhaps 15 percent.
That's still a healthy rate by European standards, but various forces are draining profits out of China -- more competition, price-cutting and a consumer swing to cheaper cars.
Chinese consumers are buying low-margin small cars this year. In 2003, large cars such as the Buick Regal were part of the fastest growing segment in China, said Troy Clarke, president of General Motors Asia-Pacific.
Then GM netted about $3,500 (E2,700) per Regal, said consultant Michael Dunne, president of consultancy Automotive Resources Asia.
But this year small cars, such as the Chery QQ priced as low as $4,000 are the hottest sellers, Clarke said.
Competition has intensified as automakers rush fresh products to market and slash retail prices. The number of light-vehicle models available has risen to 125 this year from 95 last year.
In a market of 2.5 million units annually, an average of 20,000 sales per model is a profit challenge for even the hungriest Chinese automaker, Dunne said.
Another problem is supplier overcapacity, created by overly optimistic growth projections.
"Obviously we have overcapacity in China today because we were gearing up for a steeper growth curve," said John Jones, vice president of Asia-Pacific operations for TRW Systems Consulting Services (Shanghai) Co. "Since August of last year, we have started to shift over to exports."
Metaldyne CEO Tim Leuliette said his company built capacity in China to serve only China. But he added: "Could we export? If we have to, we could."
Long-term trends for China's auto industry are clear: "Anyone who doesn't view China as the dominant auto exporter in the next decade is misleading themselves," he says. "Not only in engines but also in vehicles."
So in the looming shakeout, who will prevail? Will it be the China operations of European and US suppliers or indigenous Chinese companies? Trends favor the multinationals.
China's government is eager for a shakeout. The auto industry policy issued last year mandates that vehicles meet emissions and fuel-efficiency standards. Those that don't can't be sold in China.
The government hopes this will help drive marginal automakers out of business and encourage companies with advanced technology to locate or expand in China.
This year, the government toughened the regulation with a new import tax policy that makes it extremely expensive for car companies to keep importing advanced components and systems. As more world-class suppliers start producing in China, local suppliers that can't make such products will be driven out of business, the government hopes.
The new rules make finding local Tier 2 suppliers more important for Bosch, Colm said.
"This will increase the pressure to localize production here in China even more," he said.
But Dunne said many indigenous Chinese suppliers may survive the coming shakeout.
Said Dunne: "Don't underestimate the resolve of the Chinese to establish their own industry."
-- Arjen Bongard, Norman Thorpe, Alysha Webb and James B. Treece contributed