Is Auto Part Outsourcing In Reverse Gear Now?

Given the recent development in the auto industry, it appears that the big car makers in the US are looking eastwards in search of markets.

The sales of automobiles during the month of June in the US, is close to drop to an annual rate of 12.5 million units. Last year this figure was 16.3 million units, the differential amounts to a 15 per cent fall. The Canadian industry on the other hand is dealing with its own challenges.

Coinciding with these developments, the Big three manufacturers, namely GM, Ford and Chrysler would be exporting goods worth US$ 2.2 billion to China. The goods would include both the vehicles as well as automotive parts. There could be more deals such as these, following economic talks between the U.S. and China, which are to be held soon.

Why is China a promising destination?

Not to mention that the Chinese auto industry has it's own share of troubles, but it is still one of the most happening markets. According to a projection by Mckinsey, at present the country has the highest sales-growth rate for automobiles. Moreover, by 2010 it is expected to attain mammoth proportions and become the second largest market, just behind the USA.

There's little doubt about the fact that China's automobile production has been on the rise for years now. See below for the automobile production by the country during the past couple of years.
Between the years 2001 to 2005, automobile consumption in the country experienced CAGR of 54.42%. While the consumption showed an increase, the real promise lies in the fact the country still had only 11 automobile units for every 1000, and that's a much smaller market penetration of vehicles compared to other countries. For instance, in 2007, UK had 373 cars per 1000, US had 478 cars per 1000, Australia 485 had cars per 1000, Japan had 395 cars per 1000 and Italy had 539 per 1000.

However, simply because many people don't have cars doesn't make China a promising destination, the prime indicator of purchasing power (i.e. Per capita GDP) has continuously been on the rise. For example, in 1991 it wasn't even US$ 1000 but by 2006 it rose to US$7600. See below for the trend of the rising GDP. (the figures have been calculated in Chinese Yuan)

Not surprising then that the annual report 2007, of the largest Chinese automobile manufacturer Shanghai Automotive Industry Corporation (SAIC) anticipates selling 1.90 million units of complete vehicles in 2008.

On the whole China seems to be a hot spot as far as the automobile industry is concerned. As far as the US is concerned, though there may be some differences between the two countries about investments, but as it is learned the high ranking U.S. and Chinese officials are working to smooth out even those.