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  Ralf Cramer, Member of the Executive Board of Continental AG, President & CEO of Continental China
 
Foreign suppliers target Chinese automakers for technology sales
Hans Greimel | 2014/10/28

WUHAN -- International suppliers expect big growth in sales to China's struggling domestic automakers, which are racing to add advanced technologies and shore up sliding market share.

Big parts makers, such as Continental AG of Germany and Lear Corp. of the United States, generate most of their China revenue from global manufacturers building vehicles there. But more business will come from Chinese brands, executives say.

Chinese automakers such as Chery Automobile Co., Zhejiang Geely Holding Group Co. and Great Wall Motor Co. are desperate to get advanced technology, but Chinese suppliers can't provide the latest safety systems or fuel-efficient drivetrain technologies.

So foreign suppliers are investing heavily in China to tap that demand. Continental, for example, is investing $1 billion (6.11 billion yuan) in China over the next five years. Lear plans to open four plants and expand five others by the end of 2016.

China's domestic automakers urgently need to improve their vehicles: Through September, foreign automakers accounted for 62.4 percent of vehicle sales in China, up 2.5 percentage points from the previous year. By contrast, the market share of Chinese brands eroded to 37.6 percent.

Technology chase
Ralf Cramer, CEO of Continental China, says local Chinese suppliers need to catch up twice: first to the current level of international suppliers, then to the new level that international suppliers will have advanced to in that time.

"I see us having 10 times the experience," Cramer said in an interview at this month's Global Automotive Forum here.

Domestic automakers lack cutting-edge safety systems such as electronic stability control. Those systems are mostly standard on foreign cars, but penetration is still paltry for Chinese brands. That will change, Cramer said.

"I see no reason at all why our customers should not launch these new technologies," Cramer said. "We see a much, much higher demand in the future than we have capacity for now."

Among Chinese automakers, penetration rates for stability control will near 100 percent only after 2020. And that's a headache for Chinese automakers that want to add more sophisticated safety systems.

Electronic stability control is a necessary building block for advanced technologies such as lane-keep assist and precrash braking. Much of that technology is software driven, and there are few local competitors.

"You need the resources and the know-how," Cramer said.

Of Continental's 25,000 engineers worldwide, 11,000 are software engineers: "We are already a software company," Cramer said.

Lear also expects a big uptick in sales of electronics. It is one of the few suppliers that can provide an entire electrical architecture, from the wire harnesses to chips.

This year, Lear set up a team in China to localize development and production of those products to meet local demand, said Jay Kunkel, president of Lear's Asia-Pacific operations.

China's government requires overseas carmakers manufacturing locally to enter local joint ventures, partly in the hope that local automakers might glean some of their expertise.

But their market share keeps falling partly because domestic automakers lack access to top-shelf technology, either from domestic suppliers or joint ventures with foreign automakers.

"The technology transfer hasn't really been successful," Kunkel said. "For us, that's actually an opportunity. We need to spend a lot more time concentrating on the Chinese automakers."

Backlash
Increasingly stringent emissions standards in China complicate the equation. They pressure local brands and international ones alike, but global automakers are better positioned to respond.

Some Chinese parts makers have taken the global stage. The Wanxiang Group, for instance, bought the assets of bankrupt hybrid luxury carmaker Fisker Automotive Inc. in February and plans to relaunch Fisker's products.

But Chinese industry and government leaders bemoan the lack of competitiveness among local suppliers. They cite it as a key hurdle to establishing truly world-class homegrown brands.

"There is a lack of innovation in China," said Wang Ruixiang, chairman of the China Machinery Industry Federation. "We have a long way to go to transform China into an auto powerhouse."

The success of foreign suppliers has made them targets of government antitrust probes. This year, China's National Development and Reform Commission has investigated nearly all major global automakers and dozens of foreign suppliers. Those investigations forced most global luxury brands and several mass-market brands to cut the price of spare parts.

"The government decided they weren't going to just use financial means to recover market share," Kunkel said. "What we're looking at are some nonfinancial mechanisms being put in place to provide some breathing room.


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