The 65th (Nanjing) National Auto Parts Trade Fair ushered in warm spring

In 2008, the automotive industry chain experienced significant turbulence, particularly for auto parts companies. When it comes to the happiness index of that year, these companies were likely at the bottom of the hierarchy. The first half of 2008 saw auto parts firms grappling with soaring raw material costs and rising labor expenses. By the second half, there was little hope for a decline in raw material prices, while the domino effect of the global financial crisis hit both domestic and international auto markets hard. Vehicle manufacturers cut production sharply, leading to reduced demand and further pressure on component suppliers. Amidst this volatile environment, auto parts companies had little breathing room. Even major players with advanced technology and strong capabilities faced declining sales and profits. However, smaller firms—those relying on scale rather than expertise or those that had expanded aggressively in recent years—were facing severe challenges, even life-or-death situations. The first half of 2008 also saw oil prices surge to $147 per barrel, and iron ore prices jumped by 65%. These increases put immense pressure on auto parts companies producing items like plastic components, steel plates, and glass, despite the overall booming auto market. Since spare parts typically account for 70% to 80% of a vehicle’s cost, price wars in the auto industry often result in losses being passed down to upstream suppliers. Straddled between rising input costs and falling downstream prices, these companies found themselves in a difficult position, even top-tier firms saw their profitability shrink significantly. Fuyao Glass, a major supplier of automotive glass, reported a decline in gross profit margins during the first quarter of 2008. Its main business segments—float glass and automotive glass—both saw their margins drop from 37.69% in mid-2007 to 32.95% in early 2008. Large enterprises had the resources to adapt, such as restructuring their product lines and eliminating low-margin products. But smaller and medium-sized parts companies lacked bargaining power against vehicle manufacturers, forcing many to either shut down or pivot their operations. By the second half of 2008, raw material prices began to fall, and some automakers raised their product prices. However, the impact of the financial crisis continued to unfold, hitting auto parts companies hard again. Unlike vehicle manufacturers, many Chinese auto parts exporters focused on developed markets like the U.S., Japan, South Korea, and the EU—regions that were heavily 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 from January to October 2008. As the crisis deepened, export growth slowed dramatically. In October 2008, China’s auto parts exports to North America and Europe fell to -2.0% and 29.1%, respectively, compared to 24.8% and 55.1% in 2007. This led to a sharp decline in the industry’s export growth rate, from 37.9% in 2007 to 14.8% in October 2008. Geoff Auto’s CEO, Chen Wenkai, noted that exchange rate fluctuations had a more profound impact on auto parts exports than the crisis itself. The euro, ruble, and Australian dollar depreciated sharply in the second half of 2008, causing significant losses for Chinese exporters who had already signed contracts. Weaker currencies reduced purchasing power in these regions, leading to fewer follow-up orders. Domestically, the situation wasn’t much better. Vehicle manufacturers frequently suspended production, cut staff, and laid off workers, leaving upstream parts companies without orders. Chen Wenkai highlighted that many domestic parts suppliers operated at very low utilization rates—some commercial vehicle parts companies were running at just 10–20%, while car parts companies were at 40–50%. Sub-sectors like stamping and foundry, which had previously been in short supply, saw overexpansion and thus faced even greater challenges. Looking ahead, Chen Wenkai remained pessimistic about 2009. “The worst is yet to come for the auto parts industry,” he said. “The full impact of the financial crisis on the real economy hasn’t fully materialized, and exchange rate movements remain highly uncertain.” Bao Lingge, general manager of Bakken Business Consulting Asia Pacific, pointed out that Chinese auto parts suppliers were especially vulnerable to restructuring compared to their foreign counterparts. In China, 100 auto parts suppliers could only provide less than 50% of the necessary components, whereas in Europe and the U.S., 20 suppliers could cover around 80% of the needs. For most Chinese auto parts companies, expanding overseas seemed like an attractive but distant dream. “At present, the more realistic approach is to recruit talent abroad and invest in advanced equipment to upgrade technology and manufacturing processes,” Bao said. “Acquiring assets or companies remains challenging.” Many firms have taken similar steps in response to the ongoing challenges.

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