Wheel and Rims Industry: The Case for China and the United States - Essay Example

Wheel and Rims Industry: The Case for China and the United s Submitted By: Number] Submitted [Date Submitted] Introduction Finding the cheapest raw material for an acceptable standard of quality is the goal of every manufacturing firm especially in a business environment where competition is at its most aggressive. Automobiles have become a symbol of status and fulfillment. Over time, automobile companies have been accepted as necessary products for all but successful companies in this flourishing business do not stand on their laurels. They study market trends and change their products to meet customer demand. With methods of communication growing and new technology allowing for instant information, the exchange of information can determine how companies can gain advantage over the others. The company which looks ahead to identify and resolve global barriers will garner a larger market share. China is the market of the future, and successful companies expanding their bases throughout the world to see China as a necessary market. Why? The country that is infamous for the billions of people it harbors also has the largest workforce and the largest number of potential consumer as a consequence. This combined with the increasing trade liberalization, have made the country one of the world’s producer and consumer. It is against this backdrop that we will be analyzing the automobile parts industry. Our focus is the wheel and rims trade with the United States and China. Our goal is to determine the past, the present and the future trends in the trade. In the course of the discussion, it is hoped that the reader can gain important sights regarding the topic. The Booming China Automobile Parts Industry Chinas car wheel rim and cover industry is growing rapidly, fueled by the booming auto industry in the mainland. Ford, Fiat, Toyota, GM, Volvo, Volkswagen, Honda, Nissan and Isuzu are some of the international automakers that have set up production facilities in China. The country exported US$562.2 million worth of wheel rims and covers in 2003, and exports from January to April 2004 grew 71 percent from US$158 million in the first four months of 2003 to US$270.3 million. Impressive growth is expected to continue in the coming years. Exports of aluminum wheel rims totaled 26.4 million units in 2003, up 47 percent from 2002s 18 million units. Mining and metal industry information provider Beijing Antaike Information Development Co. Ltd projects aluminum wheel rim output in 2004 will increase more than 120 percent to 40 million units against a capacity of 45 million. Capacity is forecast to increase 10 million units each year to 2009. This is reiterated in the Global Sources Supplier Survey, which shows the majority of companies forecasting increased sales in 2005. Most of them will also increase production capacities to meet the anticipated surge in export demand. China has more than 200 manufacturers of car wheel rims and covers, but only about 70 of these suppliers are capable of export. These companies produce aluminum and steel wheel rims, and aluminum and ABS wheel covers or hubcaps. Aluminum wheel rims, which dominate production and exports, are used for cars, SUVs and light-duty trucks while steel wheel rims are for heavy-duty trucks. Among the 37 companies featured in this report car, wheel rims dominate export production with a 56 percent share. Truck wheel rims make up 31 percent of exports. (Global Sources, 2004) Heavy inflow of foreign investment — primarily from Hong Kong, Taiwan and Japan — is centered on aluminum wheel rim production. The resulting JV companies produce wheel rims for both the China factories of these leading automakers, and for export to the aftermarkets. Private enterprises are also lured by the strong growth of the aluminum wheel rim industry. Twenty-two percent of the companies surveyed for have been in the industry for five years at the most. These suppliers produce almost entirely for export, shipping mainly to overseas automakers. Those that sell locally cater mostly to domestic aftermarkets. (Legget, 2006) Top aluminum wheel rim makers in mainland China are Liufeng Machinery Industry, Dicastal Wheel, Zhejiang Wanfeng Auwei Auto Wheel, Nanhai Zhongnan Aluminium Wheel, Xiamen Mingxing Industry, China Wheel and Wheeltech Aluminum Industry. All of these companies have annual capacities exceeding 1 million units. The countrys main export markets are North America, Asia and the European Union. Fifty-seven percent of total exports are shipped to the United States alone. Although only 13 percent of export production is allotted to wheel covers, one-third of U.S. hubcap imports in 2003 come from China, at a value of US$26 million. (Icon Group International, Inc, 2005) One main concern of China suppliers is the increasing cost of raw materials. The cost of steel and aluminum has increased 70 percent and 50 percent, respectively, over the past six months. A few suppliers that are now unable to absorb the increased costs are planning to raise prices in the next few months. However, the majority will maintain prices at current levels by absorbing additional costs and cutting overhead spending. (Global Sources, 2004) China and US Trade In 1996, the US imported from China auto parts valued at 711 million dollars. This made up 1.46 percent of total U.S. auto parts imports that year. In 2001, the US imported 1.758 billion dollars from China. This accounted for 2.84 percent of auto parts imports. In that five year span China moved from eighth largest source of auto parts imports to the fifth largest for the USA. While these shifts in trade are amazing in their own right, when one looks at certain product categories an even more dramatic picture emerges. In 1998, the US imported a little less than 8 million dollars worth of aluminum wheels from China. This was 2.4 percent of total aluminum wheel imports. In 2001 that number increased to 75 million dollars or 13 percent of aluminum wheel imports and moved China from tenth largest source of aluminum wheels to the third largest. In fact for the first four months of 2002 China has passed both Canada and Mexico to become US’ largest supplier of aluminum wheels supplying over 18 percent of our imports. The United States is the biggest importer of China-made rims and covers, absorbing US$297 million worth in 2003, 53 percent of Chinas total exports for that year. (Global Sources, 2004) This surge in trade is a result of a surge in foreign investment in China and the licensing of foreign technology by Chinese firms. It is estimated that by 2001 there were more than 300 foreign auto parts suppliers with investments in China. Since that time scores of companies have announced new or expanded investments in China. While there are quite a few U.S. owned auto parts companies with operations in China, the biggest investors to date have been the Europeans. This year the Japanese have become the most active investors. (Santucci, 2002) The Japanese automakers have all put a great deal of pressure on their supply base to lower the price of their components and component systems. As a result of this price pressure many Japanese suppliers have announced new facilities in China. Many of these companies mentioned that they were making the investment as a result of the pricing pressures from their customers. The others were investing to serve the automakers in China. To put it simply, producing in China is much cheaper.   With the level of investment in the Chinese auto parts industry increasing at a rapid rate it is highly likely that the U.S. auto parts industry will face increasing competition from China. US Entry into the Chinese Market The question for the U.S. supply base is how to proceed. With the increasing investments and the hyper growth of the China’s industry, the US manufacturers of wheels and rims may find themselves at the losing end. I believe that for some an investment in China makes sense. Those companies with size and depth of management as well as potential customers in China should be there. Other companies that produce parts where China has a competitive advantage should also look for a presence in China or at least in another low cost country. North American aluminum wheel suppliers have for the most part shunned Asia. Hayes Lemmerz with a small plant in Thailand is the only American aluminum wheel maker in Asia. Major automobile parts companies such as Superior, Alcoa, Amcast, and American Racing do not have wheel plants in Asia. It is only a matter of time before a company like Amcast or American Racing loses business to the low cost producers in China. If they are not already thinking about going there, they should start. What about for the smaller automobile parts US companies? If they are not a large company with a deep management, then China should be seen as a source of low cost components. China has over two thousand OE parts suppliers. Most do not have the capabilities of US smaller suppliers. However, they could be a good source of intermediate goods such as raw castings or forgings. U.S. and Canadian companies should utilize their strengths in design, engineering, and marketing and utilize the Chinese strengths in manufacturing costs and the ability to maintain a workforce in jobs where the work environment is less than ideal. Trends in Wheel and Rims Design Since being rolled out by the Ancient Greeks in around 3500 BC, the wheel has been constantly re-invented. Today, the main innovations centre on producing larger, brighter and cheaper wheels. For some time, aluminum (alloy) road wheels have been the most popular material of choice by the automobile manufacturing industry recognizing both the weight efficiencies of aluminum and its visual appeal. According to the American Iron and Steel Institute (AISI), however, steel wheels are making a comeback as vehicle makers realize they can save up to US$250 per vehicle, without sacrificing quality or performance. AISIs member companies represent about 75% of both the US and North American steel capacity. At one time, steel was 100% but then slipped down to 40%. We are now seeing steel wheels rebounding. They feel that the aluminum wheel market has matured to the extent that it is losing market share. They claim that automobile companies can increase their margin by up to US$250 per vehicle if they use steel wheels. They also claim that DaimlerChrysler, Ford and GM and a number of Asian and European carmakers, are changing back to steel wheels for base wheels as well as for upgrade packages. Among the reasons for steels comeback, says the AISI, are better steel and better wheels. (Beecham, 2006) This strategy of US manufacturers can be seen as a response to the aluminum dominated production of Chinese firms which tells us that although Chinese production is growing, they may be growing towards non suitability as steel will replace aluminum. Nonetheless, with the support of the Chinese government, Chinese firms can also revert to steel thereby eliminating the disadvantage from producing steel wheels. Conclusion From the foregoing discussion, we can see that China’s ascent in automobile parts production with the increasing investments pouring in. The United States automobile manufacturing companies are increasingly relying on Chinese imports thereby endangering local firms. Nonetheless, these local firms can survive by also locating production plants in China. Though we did not discuss the reception of Chinese products entering the US market, it can be surmised that American society has accepted using the imports. Also, I was unable to find China imports of US automobile parts but we can also surmised that with the number of local manufacturers and the current trends in the industry, US automobile parts has little chances of entering the market. References: Beecham, Matthew. (2006).A wheel story. Accessed April 27, 2007 from www.just-auto.com/article.aspx?art=1210&type=2 Santucci, Marc (2002). The Auto Parts Industry in China Is Set to Take Off. Accessed April 27, 2007 from www.eautoportal.com/News/China-article-ii.asp Global Sources (2004). China Sourcing Report: Car Wheel Rims & Covers. Global Sources Publications. Leggett, Dave (2006). China wont rush to world markets. Accessed April 27, 2007 from www.just-auto.com/article.aspx?ID=87179&lk=np Icon Group International, Inc. (2005). The 2006-2011 World Outlook for Wheel Rims and Spokes for Bicycles, Unicycles, and Adult Tricycles. Icon Group International, Inc. Publications Read More