Is It Rough Weather For Chinese Auto Parts?

The Chinese auto parts industry has consistently performed and grown over the past few years. However, now it may up against some tough times owing to increases in wages, local currency and prices of raw-materials.

The Times Bygone

Last year in 2007, the market growth of the China experienced record high growth in terms of both production and consumption of automobiles. As people's incomes rose so did consumption. The year 2007 witnessed a production of 8.88 million units and consumption of 8.79 million units.

In terms of exports China registered US$ 2.09 billion worth of trade. A year before that in 2006, the sales revenue of the Chinese auto part manufacturers reached US$ 58.30 billion. What's even more intriguing is the fact that the Chinese auto parts production is projected to reach US$ 115.6 billion in 2010.

A lot of this growth is attributed to roughly 1,000 auto parts oriented industrial throughout the nation, and that about 10% of these lie in prime regional development zones and clusters.

The Present Scenario

The present year is being seen as a year of correction year. According to the National Statistics Bureau, China, the growth rate witnessed during the first two months of 2007 was 90%. However, over the same period this year, it's just been 37% a big difference of 53%. Undoubtedly the growth rate has suffered quite a lot.

Increasing Raw Material Costs

The costs of raw materials such as oil and aluminum have risen, which in turn seem to have affected the cost of production. The manufacturers of automotive wheels and tires are worst hit as a consequence. On similar lines producers of molded plastic parts and automotive accessories for cars have also taken a beating.

Appreciating Currency

The Chinese Yuan has also witnessed the highest growth against the dollar since 2005, when the Chinese government took measures to liberalize the exchange rates. The appreciation has been to the tune of 14% or so against the US dollar, and most of the appreciation has taken place during the past year.

Considering the appreciating currency, it's a no-brainer that the first quarter of auto-parts exports this year grew at a rate of 24%, which is a good 9% lower than 33% last year and same quarter.

Rising Labor Costs

It's one of the most important constituent of production cost, and was also the one that gave the Chinese auto accessories and parts manufacturers an edge over manufacturers in US or Europe. Consider this, labor costs in China contribute only 5% to the cost auto parts produced, whereas in Europe or in the US it's much higher and lies between 20% and 30%. However, during 2005 the wages experienced a hike of 40% in that year itself, diluting the comparative advantage somewhat.

On the whole, the times for the Chinese auto parts manufactures do appear to be tough, and that the smaller fish are expected to take a bigger hit. However, as the Shanghai Daily reports, many Chinese companies are seeking consolidation through mergers and acquisition, enhancing managerial expertise and becoming more export oriented to overcome any roadblocks to growth.