31 Aug 2015
Promising Prospects for Hong Kong in West China's Auto Part Sector
The dramatic growth of the automotive sector in Western China offers four clear areas of opportunity for Hong Kong businesses – auto part product development, international network support, R&D collaboration and bespoke services.
According to the most recent government statistics, China's automobile production output and sales were both in excess of 23 million vehicles in 2014, seeing the country staying at the head of the global league in both categories. Among the five mainland provinces and cities with the highest output volumes, two are located in the western region – Chongqing and Guangxi. The western region has now grown to become China's fifth largest automobile production base, a development attributable to its considerably lower production costs than the coastal provinces, as well as the impressive prospects offered by both the south-western region and the southeast Asian markets. With the rise of a number of emerging markets, notably Vietnam, Myanmar, Thailand, the Philippines and India, the demand for automobiles has inevitably continued to grow.
In 2014, Guangxi's automobile industry produced two million vehicles, representing a gross output value of more than Rmb210 billion. This established Guangxi in the fifth position in the national league of whole vehicle production volume, trailing only Jilin, Shanghai, Guangdong and Chongqing. Currently, Guangxi has the capacity to manufacture a full range of vehicles, including passenger cars, trucks, multi-purpose vehicles (MPV) and crossover passenger cars, as well as a range of specialised vehicles. It also has a comprehensive auto parts industrial infrastructure, producing key parts and components, such as engines, rear axles and vehicle bodies. Guilin is also a growing production base for whole vehicles and parts, as well as being home to a number of renowned automobile groups – Daewoo of Korea (passenger cars), Fuda Group (auto parts), and Quick Bus (special-purpose vehicles and new energy cars).
By contrast, Nanning city is more of a production base for auto parts, aluminium alloys and special-purpose vehicles. Leading auto parts companies in the city include Baling Technology (radiators) and Alnan Aluminium. Liuzhou is more of a production base of whole vehicles and auto parts, with its well-known local auto businesses including SAIC-GM-Wuling Automobile (SGMW), Dongfeng Liuzhou Motor, Wuling Group, China FAW Group (special-purpose vehicles), Liuzhou Yanlong Motor Corporation (specialised vehicles) and SAIC Automotive Transmission. Yulin, on the other hand, is more of a production centre for diesel engines, as well as whole vehicles and auto parts. Leading industry players in the city include Yuchai Machinery (car engines), Yuchai Special Purpose Vehicles and Yuchai Machinery Group (auto parts).
Since the 1960s, a number of Hong Kong companies have been engaged in the trading and production of auto parts. Among these is Johnson Electric, one of the world's largest engine manufacturers, as well as a supplier of drive-device subsystems and drive components. Typically, Hong Kong manufacturers have specialised in producing moulds, metal parts and in-car entertainment equipment, as well as in being experts when it comes to introducing new technology. Throughout the years, Hong Kong manufacturers have focused on the global markets, while also gaining a familiarity with international standards. As China and emerging Asia become ever more significant in terms of global automobile manufacturing industries and purchase, Hong Kong's auto parts industry would be well-advised to closely follow the trends in the market, while adjusting its production and marketing strategies accordingly.
Western China's automobile industry has been expanding at a phenomenal rate over recent years. This has not been a matter of mere chance. Liuzhou, for example, possesses a robust industrial foundation, something that has attracted China's four biggest automobile groups to set up production lines. Producing more than two million vehicles annually, the city's overall manufacturing and support systems have now become a sizeable market in their own right. There are now four key ways in which Guangxi's flourishing automobile industry can offer new business opportunities to Hong Kong's auto parts industry:
1. Engaging With Manufacturers as Part of the Development Process
- Guangxi's sedan car and multi-function vehicle output has grown significantly over recent years, leading to a rapid rise in demand for auto parts. The local supporting systems are presently catering mainly for smaller vehicles and trucks, while its auto parts are mostly intended for special purpose and structural use, typically lacking high value-added components. As such, the supporting channels of auto parts enterprises are relatively homogenous, while the sedan cars' supporting systems are still underdeveloped. All of these factors present significant opportunities for Hong Kong companies.
- Although Hong Kong is not a manufacturing hub for automobiles, a significant number of local companies have been engaged in the auto parts and accessories business for many years. A number of companies, as well as operating auto parts trading and manufacturing businesses, are also suppliers to large automobile manufacturers in the US, Europe and Japan. A number of them are even Tier One and Tier Two suppliers. With China now the world's leading automobile manufacturer – and with two of its key production centres based in Guangxi – Hong Kong's auto parts makers would do well to focus on the development of automobile manufacturing in western China. This would enable them to capitalise on their own advantages as suppliers of support systems for Guangxi's whole-vehicle enterprises.
2. Providing International Network Opportunities
- At present, Guangxi's total whole-vehicle export ratio is on the low side. Among the whole-vehicle enterprises, overseas exports account for less than 1% of their business, while relatively few auto parts products are destined for the export markets. In light of the excess production capacity of China's automotive businesses, Guangxi's automobile enterprises are now looking to proactively explore the international markets, while also considering setting up overseas production bases. SGMW, for instance, has started work on establishing a production base in Jakarta, the Indonesian capital. The company sees this new factory as manufacturing Wuling brand products in the future, with the seven-seater MPV as its core product. In other moves, Daewoo's plant in Guilin is also looking at global opportunities. Through enhanced collaboration with Hong Kong, it is hoping to use the city as a platform to boost its international sales.
- Hong Kong's auto parts and accessory industry is mostly targeted at the international market, with more than 50% of its output exported each year, principally to the US, EU and Japan. Compared to the mainland, Hong Kong has a more mature international network and is well versed in the regulations of the overseas markets. Additionally, Hong Kong's financial, accounting and legal professional services are well suited to assisting Guangxi enterprises in their ‘going-out' initiatives.
3. R&D Support and Collaboration
- According to the relevant government departments, Guangxi's local independent development capability remains relatively weak. Despite the massive scale of Guangxi's automobile production, its number of independently-developed intellectual property products is notably limited. Lacking independent development capability and quality assurance systems, the relatively low R&D, inspection and testing standards of mainland SMEs have all contributed to this shortfall.
- By contrast, the Hong Kong government has long placed great emphasis on the R&D of the auto parts industry, a commitment underlined by the 2006 launch of the Hong Kong Automotive Parts and Accessory Systems R&D Centre. Overall, Hong Kong has a large pool of experienced practitioners and well-established intellectual property intermediary organisations. These are able to leverage on Hong Kong's advantages to strengthen collaboration with Guangxi enterprises in areas such as R&D, inspection and testing, automotive core technologies and intellectual property rights trading.
4. Bespoke Services
- According to government figures, car ownership in Guangxi reached 2.7 million in 2014, a year-on-year increase of 19.2% – up some 433,500 vehicles compared to 2013 – with an average ownership rate of 6.74 vehicles per 100 people. Ownership of private sedan cars showed a net increase of 256,600 vehicles, making up 51.7% of the total increase in private car ownership.
- Amid the continuous rise in the income levels of Guangxi residents, the demand for bespoke vehicles has also grown. Car products, the modified car market and car customising services have all become fast growing industry sectors over recent years. With Hong Kong's digital car products and in-car entertainment equipment enjoying an enviable reputation within the industry, many Hong Kong companies are also dealers in globally-popular car enhancement products. In light of this, they would be well advised to take advantage of the bespoke opportunities opening up in Guangxi. With this in mind, they should consider establishing a presence in the region in order to service south-western China and the ASEAN markets.
Edison Lian and Wing Feng, Guangzhou Office