Top Ten Keywords in the Automotive Industry in 2008: A New Pattern of Joint Venture for Commercial Vehicles
In recent months, AlixPartners, a well-known consulting firm, and a prominent domestic commercial bank have both released detailed reports analyzing the financial health of Chinese auto parts companies. Both studies highlight growing concerns over liquidity challenges within the sector, signaling potential risks for the industry as it navigates an increasingly complex global market.
According to an internal report from a major Chinese bank, despite China becoming the world's largest automotive market in the first quarter of this year, nearly 25% of sales from domestic auto parts manufacturers are directed overseas. These exports are largely managed by primary and secondary suppliers, who purchase and distribute the goods internationally. This significant share underscores the deep integration of Chinese parts into global supply chains.
The ripple effects of the ongoing global automotive crisis continue to impact the industry. For instance, in 2004, there were approximately 22,000 auto parts manufacturers in China, with 5,600 operating at or above scale. By 2007, that number had risen to 7,580 enterprises, and total sales revenue surged by 44% year-on-year. However, by 2008, while total auto parts sales reached 928 billion yuan, the growth rate dropped significantly—only half of the previous year’s increase. A key factor was the sharp decline in exports, particularly in the U.S., where parts sales saw a 10% contraction.
Although China ranks third in auto parts exports, behind the U.S., Japan, and Germany, with $102 billion in exports, the gap with Germany is just $7 billion. However, when it comes to profitability, the situation is far more troubling. In 2008, Chinese auto parts manufacturers maintained a profit margin of 5.1%, higher than the 3.2% average for automakers. But globally, Japanese suppliers led with the highest margins in the fourth quarter, followed by European firms, while China and the U.S. reported negative margins of -9% and -14%, respectively. Even整车 (complete vehicles) saw a similar -8% margin, indicating a broader industry-wide struggle.
A recent AlixPartners study on the 2009 Chinese auto parts industry revealed that many manufacturers are facing severe cash flow issues, declining sales, and shrinking export markets. Four companies are reportedly struggling to survive a liquidity crisis, and 20% of component suppliers suffered net losses in 2008. Moreover, 50% of suppliers are projected to have a net profit margin below 5% in 2009. Without immediate action, some companies may go out of business within the next 12 to 18 months.
Historically, Chinese auto parts companies had stronger working capital compared to their international peers. However, with the tightening of credit conditions and a forecasted year of shrinking profit margins and slower growth, the favorable financial environment is unlikely to return. As a result, Chinese auto parts suppliers must focus on improving cash management to ensure liquidity and long-term survival.
The report also highlights that the industry’s cash flow issues are reflected in stagnant merger and acquisition activity. The willingness of Chinese auto parts companies to pursue overseas acquisitions has declined sharply, dropping from 50% in 2008 to just 25% currently. While global automotive turmoil has increased, the number of attractive acquisition targets has grown, yet company interest in buying or selling remains flat. This trend suggests worsening financial conditions. Additionally, recent M&A activities have been driven mainly by vehicle manufacturers rather than parts suppliers, further highlighting the sector’s struggles.
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