China – big, but not easy

German car manufacturer Audi – a Volkswagen Group company – hopes its Chinese manufacturing facility in Changchun, will be a cost-effective and high quality hub for procurement. The Volkswagen Group has two joint ventures in China to manufacture Audi vehicles – with the First Automobile Works (FAW) to manufacture the Audi 100 and later, a three-way JV with FAW, Volkswagen and Audi, to manufacture the Audi 200 and Audi A6.

According to Audi, it is the market leader in China in the premium vehicle segment. The Audi A6, manufactured in Changchun and introduced in China in 1999, was the first luxury sedan to be produced in the country.

However this year, the Audi’s parent Volkswagen, saw the Chinese market slipping from its hands. In this fiscal years third quarter results, VWs market-share fell from 24.2% to 17.3%. After making an operating profit of Euro 268m (US$313m) last year, it faced losses in China this third quarter of Euro 67m (US$78m).

To counter the losses, VW announced in October 2005 that it would introduce 10 to 12 new models in China by 2009 and boost the use of locally manufactured parts. The company also plans to cut back investments in the country. We have reduced our inventory in China significantly by 40,000 units,” said Stefan Jacoby, sales and marketing chief at VW in an interview with Bloomberg.
Audi and parent VW have no plans as yet to use China as a manufacturing hub for global exports. Most of the 450,000 vehicles manufactured by the VW Group in China are for the domestic market. The company is busy trying to consolidate its market share rather than export vehicles from China. “[We have] no plans for export yet. Our local production in Changchun is dedicated just for the Chinese market,” said Trevor Hill, executive director of Audi China, speaking to China Business in October 2005.

“Today we are in a transitional phase, where we are laying foundations preparing ourselves for a more sustainable development of our company in China,” said Winfried Vahland, president and chief executive officer of the Volkswagen Group China and the company’s global vice president, speaking to local media, quotes China Business.

Like other international companies trying to do business in China, Audi still has not found the economic rationale in exporting vehicles made in its Chinese facilities. The company is trying to work out how to stream-line its supplier base. The company wants to cut manufacturing costs by 40% by increasing use of locally made components. But with rising steel and oil prices, this may be difficult.

However the company is looking at sourcing parts globally from its Chinese factories. Audi hopes to induct suppliers into its global sourcing system and have them contribute in the manufacture of future Audi vehicles manufactured outside China. “We should provide opportunities for China’s qualified producers,” said Eric Schmitt, head of Audis Chinese business, global purchasing and finance, speaking to China Daily.

A big problem faced by vehicle manufacturers in China is protecting their patented technology under the current technology transfer requirements to local partners that China has. Audi itself faced problems in the 90s when it saw its Chinese partner launch the Red Flag sedan, which was similar to the Audi 5000.

The US$400-m Kongsberg Automotive, which manufactures gearshifts, seat comfort solutions and commercial vehicle systems, set up a manufacturing facility in Wuxi in the Jiangsu Province, China in 2004. Apart from targeting the local market, KA plans to use the facility as a procurement hub.

Some of the Norway-headquartered Kongsberg Automotives clients include, BMW, DAF, DaimlerChrysler, Ford, GM, Opel, Peugeot-Citroen, Renault, Saab, Scania, Toyota and Volvo.

While the European and North American vehicle industry has been hit by falling sales, Kongsberg Automotive has managed to keep profitable mainly by focussing on new and growing markets as well as on its existing customers.
However Kongsberg Automotive may find China a complicated market as far as technology transfers go. The company will need to protect its technology – Kongsberg Automotive has patented technology for its gearshifts, seating and commercial vehicle systems. As Kongsbergs Chinese arm is fully owned by the Norwegian major, it may not be affected by potential patent infringements. Kongsberg Automotive (Wuxi) Ltd is a wholly owned company be Kongsberg Automotive Holding ASA in Norway, so called WFOE.

Automotive Industries spoke to Bent Wessel-Aas, president Far East of Kongsberg Automotive.

Automotive Industries (AI): What products do you currently manufacture in China? Any plans to expand your product portfolio in the country?

Wessel-Aas: We have started with assembly of seat heaters to the local car manufacturers like Audi and KIA. In 2006 we will add new customers to our customer base here in China both for seat heating and gear shifters for automatic gearboxes.

AI: Is China going to be used as a global procurement hub or are you selling what you manufacture in the country locally? How much of your Chinese production is exported?

Wessel-Aas: We have primarily set up our operations to support the Chinese OEMs for all our products. As of next year, we are also able, not only to assemble, but also do the complete manufacturing in house. We will then move some production from other KA sites to China. This export will primarily be to the Asian markets, for example, South Korea and Japan. Building up a local supplier base here in China would also mean that we may find components for KA units globally.

AI: How does Kongsberg Automotive plan to protect its technology from being used illegally in China?

Wessel-Aas: We do patent our products – also in China. Even though there are numerous cases of infringement, the authorities are working harder to protect companies against infringement – though the progress is slow. No doubt we will pursue any infringement of IPR going forward.

AI: What has Kongsbergs experience of doing business in China been like so far? For example, what are the issues you face with suppliers and customers?

Wessel-Aas: As the automotive industry is working with the same standards globally, the environment is pretty similar regarding the customer side of it. The official part of doing business, that is, towards the authorities may be bureaucratic from time to time, but that we know from every country – its only different. You fast learn to know the importance of Guanxi. Suppliers are not familiar with the auto industrys demands and requirements, but they are fast learners. We put a lot of effort into teaching them what is required.

AI: Many automotive component companies plan to shift production to low-cost countries – is this what Kongsberg Automotive plans to do? And if so, how much of your manufacturing do you plan to shift?

Wessel-Aas: KA has for many years moved labor intensive manufacturing to countries like Poland and Mexico. Lot of KA products though do have a limited degree of direct labor as far as the total cost is concerned due to high automation – these products we do not have to move to low cost countries for the sake of lowering the cost. The total cost chain including logistic costs has to be considered carefully before taking any decision as to where to produce.