• Chinese Automotive Boom Offers Suppliers Rewards - and Risks
  • April 30, 2003 | Author: Grace Parke Fremlin
  • Law Firm: Foley & Lardner LLP - Washington Office
  • As recently as 20 years ago, most residents of China were getting around by bicycle. Today, China - with a boost from the world's leading automotive manufacturers and suppliers - is poised to become one of the largest producers of automotive vehicles in the world. China is not only growing to meet fierce demand from its own citizens, but also to become a global player in the competitive automotive industry.

    What's remarkable is that China did not even have an automotive industry until the early 1950s, shortly after the Communists took control of the country. It took another 40 years for the country to reach an annual output of 1 million vehicles. Since 1992, however, the growth of the Chinese automotive industry has been astounding. By 2000, China was producing 2 million vehicles annually. Two years later, volume soared to 3.2 million, and it is expected to top 4 million by the end of this year. Forecasters predict the country will be the fourth-largest producer of vehicles in the world by 2008, and may be the third-largest producer by 2010.

    At the same time, of course, sales for the American automotive supply industry continue to slide as more and more OEMs seek lower-cost components. However, helped by organizations like OESA, American carmakers and suppliers are looking for and finding opportunities in China.

    Earlier this month in Detroit, OESA offered a half-day session, "Business Opportunities in China," during the annual SAE World Congress, bringing together U.S. suppliers and officials from both the Chinese government and the automotive industry. During the event, a panel of experts offered advice to representatives of U.S. companies seeking to find ways to enter the booming Chinese market.

    "China is hot, sizzling hot - and US companies are succeeding in China," said Grace Parke Fremlin, a partner in the Washington, D.C., office of the national law firm of Foley & Lardner, which sponsored the event. Fremlin, chair of the firm's Asia Practice, specializes in international business, new investments and company mergers and acquisitions, and her practice often focuses on the formation of foreign subsidiaries, joint ventures, branches and representative offices, particularly in China.

    Fremlin observed, "Just as China's Open Door Policy in 1979 fueled economic reforms, China's entry into the World Trade Organization in late 2001 will be the engine for legal reforms. These reforms will offer foreign investors more legal options and fewer restrictions in China." She outlined a variety of legal structures U.S. companies might use to set up shop in China.

    Many of the speakers agreed that, although China affords great opportunities for American companies, it also poses risks. John Wehrenberg, senior director of Asian Operations-LVS for ArvinMeritor, cited such obstacles as reverse engineering, partners who are also competitors, and continuing price deflation. He and other panelists emphasized the importance of having strong intellectual property protection and aligning with a partner whose vision reflects yours. "If you can demonstrate a cheaper, better way to do something, you'll get business," Wehrenberg said.

    XingYuan Sun, director of China Sales, Marketing & Business Development for TRW Automotive, sees continued opportunities for growth, especially in the underdeveloped cities in western China. Currently, he said, the Chinese automotive component industry has limited R&D capability and "cannot directly support major car production." He added that companies with a technology portfolio have a chance to succeed if they can integrate systems effectively. Sun, who is a Six Sigma Master Black Belt, lives in Shanghai and spent a year teaching Six Sigma methods to Chinese automotive officials.

    Panelists noted that most major OEs are doing business in China today, and those who are not have begun negotiations with Chinese officials. Suppliers, including a growing number of American companies, are supporting them in increasing numbers, and finding rewards as well as challenges as they build relationships in this challenging environment.

    Zhang Xiaoyu, president of SAE of China and vice president of the China Machinery Industry Federation (which replaced the former government-run Ministry of Mechanical Industry), said in greeting U.S. suppliers before the conference began: "I hope this forum will be the new beginning for the technology transfer and trade development of the U.S.-China automotive component industry. We welcome ever-growing U.S. outsourcing development in China."