How to Survive the Cracks in China's Auto Parts Industry in 2009
In 2008, the automotive industry chain faced significant challenges, particularly for auto parts companies, which were among the most vulnerable. During the first half of the year, these companies struggled with rising raw material costs and increasing labor expenses. By the second half, there was little hope of a decline in material prices, while the ripple effects of the global financial crisis led to a deep downturn in both domestic and international auto markets. Vehicle manufacturers drastically reduced production, and shrinking demand hit auto parts suppliers even harder.
Amid this turmoil, few opportunities remained for auto parts companies to recover. Even major enterprises with strong technological capabilities saw their sales and profits drop. Meanwhile, smaller firms—those relying on low margins and large-scale operations—were at risk of collapse. The situation was especially tough for those that had expanded aggressively in recent years without solid expertise or competitive advantages.
In the first half of 2008, oil prices surged to $147 per barrel, and iron ore prices rose by 65%. These increases placed immense pressure on auto parts companies producing items like plastic components, steel plates, and glass. Despite the booming auto market, these companies found it difficult to maintain profitability.
Since spare parts account for 70%-80% of a vehicle's cost, price wars in the auto industry often hit upstream suppliers hardest. Companies caught between rising input costs and falling downstream prices were squeezed financially, even leading to reduced profits for top-tier firms.
Fuyao Glass, a major supplier of automotive glass, reported declining gross profit margins during the first quarter of 2008, dropping from 37.69% in mid-2007 to 32.95%. Large companies could weather the storm through restructuring and product optimization, but smaller firms lacked bargaining power and were forced to either close or pivot.
By the second half of 2008, raw material prices fell, and some automakers raised their product prices. However, the lingering impact of the financial crisis soon took its toll. Auto parts companies, already struggling, had little time to recover.
Export-dependent parts companies were also hit hard. Markets in the U.S., Japan, South Korea, and the EU—key export destinations—were severely affected by the crisis. According to a report by China International Capital Group, North America, Europe, and Japan accounted for about 65% of China’s auto exports in the first ten months of 2008. However, as the crisis worsened, export growth slowed dramatically. In October 2008, China’s auto parts exports to North America and Europe dropped sharply compared to the previous year.
Geoff Auto’s CEO, Chen Wenkai, noted that currency fluctuations had a more immediate impact than the crisis itself. The euro, ruble, and Australian dollar depreciated significantly, reducing purchasing power in key markets and leading to fewer orders for Chinese exporters.
Domestically, the situation was no better. Vehicle companies were cutting production, laying off workers, and suspending operations, leaving parts suppliers with little to do. Chen mentioned that many parts companies were operating at less than 20% capacity, with commercial vehicle parts producers barely reaching 10%.
Sub-sectors like stamping and foundry, which had previously experienced high demand, now faced overcapacity and severe impacts. Looking ahead, Chen expressed little optimism for 2009, stating that the full effects of the financial crisis were still unfolding, and exchange rate volatility added further uncertainty.
Bao Lingge of Bakken Business Consulting Asia Pacific highlighted that Chinese auto parts suppliers were at greater risk of being reshuffled compared to their foreign counterparts. In China, only about 50% of auto parts came from local suppliers, while in Europe and the U.S., just 20 companies provided around 80% of the needed components.
For many Chinese auto parts companies, expanding overseas seemed tempting but unrealistic. Instead, the more practical approach was to invest in talent and technology, upgrading equipment and processes. Acquiring foreign assets or companies remained a challenge, and many firms opted for similar strategies to stay afloat.
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