SCDigest editorial staff

The News: Story in the Wall Street Journal says rapid gains in the quality and sophistication of Chinese manufacturing are leading to large increases in market share in the automotive parts and components industry

The Impact: More challenges for domestic manufacturers in North America and Europe, as the high-end edge they have held also starts to recede

The Story: According to the Wall Street Journal, rapid improvements in Chinese manufacturing capabilities are leading to strong gains in market share in high-end automotive parts and components, putting still more pressure on struggling domestic manufacturers, and portending vigorous competition in an array of other higher end products.

Once relegated to commodity, low value automotive parts, now “quality has improved so much that major Western auto makers like Volkswagon and Daimler-Chrysler say they plan to buy billions of dollars of [higher end] Chinese-made components in coming years,” according to the story.

Just a few years ago, some critics estimated it would be years before the Chinese would be able to produce sophisticated components at an acceptable level of quality.

Employment in U.S. auto parts manufacturing jobs fell from 721,000 in 2002 to 644,000 in 2004, according to government statistics, and more jobs have certainly been lost since then. Parts Giant Delphi, as part of its major strategy change and emergence from bankruptcy, has already announced plans to move much production offshore.

The story quotes the CEO of one mid-sized U.S. parts manufacturer as telling a recent government hearing that, “Chinese bids for auto parts orders have driven customers price targets to a level below our costs on some products.”

Keep in mind, this is in an industry that has regularly received criticism for driving parts domestic pricing down already to unprofitable levels through tenacious OEM procurement strategies, as the wave of parts bankruptcies attests.

Perhaps surprisingly, the move by China to higher-end products is in part a reflection that in its coastal, urban areas, costs have risen to the point that relying on labor cost advantage alone is insufficient to be highly competitive against costs further inland or in other parts of the globe for low value and commodity goods production.

It is also being driven by Western manufacturers investing in direct Chinese plants not only for export but also to tap into the domestic Chinese market, which is huge and growing.

It’s only going to get more competitive. The Wall Street Journal article quotes Western CEO of one Chinese parts manufacturer as saying, “When we started exporting in 1997, people argued that you couldn’t make products cheaper here. People also argued China would never be a large car market. Now the conventional wisdom is that China can copy but not create. That’s going to go to.”

Will the Chinese soon dominate high-end manufacturing too? Is there any hope for U.S. parts manufacturers? Let us know your thoughts.