ARTC Chairman Proposes Development Guidelines for Taiwan's Automotive Industry

By QUINCY LIANG

Taiwan's automobile market has been stalled in low gear for more than two years, with annual sales stuck in the range of about 320,000 to 340,000 units. The saturated market has pushed some local automakers out of business in recent years, and the rest have been scrambling to survive. Complicating this task is the huge market and low-cost labor less than 200 kilometers away in mainland China.

The challenges posed by China are expected to intensify as the automobile market there revs up. Yet several industry insiders in Taiwan see a way forward for struggling automobile and auto parts suppliers.

One of them is Huang Wen-cheng, chairman of Automotive Research & Testing Center (ARTC), a semi-governmental vehicle testing center in Taiwan, and deputy CEO of the Yulon Group, the largest automobile manufacturing conglomerate in Taiwan. Huang spoke on the topic of "Facing the New Era--Taiwan Automotive Industry's Development Strategies" at a recent forum held by Bureau of Foreign Trade (BOFT) under the Ministry of Economic Affairs.

Facing the New Era

"We are facing a new era in the global automotive industry and changes in the new era are so frequent and rapid," Huang pointed out. "Many things people never considered before now turn into realities at a rapid pace, while industry players can no longer survive by sticking to old attitudes and methods."

There are many trends shaping in the new era, but one of the most important is the reshuffling of the market ranks and game rules with the rapid rise of Asian automakers.

Huang said that Toyota Motor Corp. of Japan would soon topple General Motors (GM) of the United States to become the world's largest automaker, noting that in the first nine months of 2007, Toyota reported accumulated auto sales of 7.05 million units worldwide, only 10,000 units behind GM. U.S. automakers are also slipping in their huge home market, with a total share estimated at only 48% in 2007, compared with 68% in 2000.

Another change is that the Hyundai-Kia Group of South Korea has grown to become the world's sixth-largest automobile conglomerate.

In mainland China, one of the most important rising markets, automobile exports rose to 420,000 units in the first 10 months of 2007, up 64% from the same period a year before. China-made cars are very competitive, especially in developing nations, due to their low cost.

Under pressure from Asian automakers, more and more automakers in Europe and North America are trying to find cost-competitive car models produced in Asia, Huang said. GM, for example, acquired Daewoo Motors of South Korea to round out its compact car line, while Chrysler has been seeking partners in Asia to jointly develop strategic car models for the global market.

Huang noted that all major European, Japanese, Korean and American carmakers are setting up shop in China with local partners there, including GM, Ford, Chrysler, Volkswagen, Mercedes-Benz, Peugeot-Citroen PSA, Mitsubishi, Nissan, Toyota, Honda, and Hyundai.

Taiwan's Chances--Outsourcing From Asia

For Taiwan, the global auto industry's rush to China presents new opportunities. Local firms are masters of small-batch, large-variety production, rapid tooling, high quality, and fast market response, Huang observed.

At the same time, an increasing number of tier-one parts suppliers in Europe and America are going bankrupt or restructuring. According to statistics compiled by Fourin Inc. of Japan, which conducts research and analysis of the Global automotive industry, the number of tier-one parts supplier in North America plunged from 750 in 1998 to only 300 in 2004, and the figure is anticipated to slip further to about 200 in 2008. Among the many big names filing Chapter 11 are Delphi, Visteon, DANA, and Lear. Still others face a difficult operating environment ahead.

Both European and American car makers and tier-one parts suppliers have been contracting more of their supply from Asia to cut costs, and the volume of such orders is growing quickly, Huang explained. GM and Ford's total annual procurement value from Asia, for example, is expected to reach about US$10 billion compared with US$1.2 billion in 2005. That means lucrative opportunities for Taiwanese automotive companies.

Another result of the booming Asia market, according to Huang, is that a group of major tier-ones have set up R&D centers in Asia, including Bosch, Denso, Delphi, TRW, and Hella. This will further position Asian companies to become second-tier players in key global automotive supply chains--initially in Asia and then worldwide.

M-shaped Consumption

Huang said that the current auto market is characterized by an "M-shaped" buying pattern. "Consumers are clustered at the ends—high-end, high-price or low-end, low-price," he said.

According to forecast made by CM Worldwide Inc., the demand for compact cars is expected to grow by 30% annually to 27 million units in 2013, with major consumer groups in developing nations; while demand for sport utility vehicle (SUV) products to decline by 4% annually to about 10 million units. That implies a renaissance of compact cars in the global market, he said with his observation into the global automotive market.

In Japan, where compact cars account for about one-third of the overall market, the demand for smaller cars has been rising since early 2007 and total sales volume in the first half reached 181,549 units, up 9.1% from the same period of last year and the only segment in the slowing Japanese automobile market to gain.

In the U.S., Huang analyzed, the share of small cars rose from 13.6% in 2004 to 17.7% in 2006, while in the used-car market the penetration ratio is about 15% (most buyers of used small cars replace their gas-guzzlers with such vehicles). In Taiwan, new-car sales are expected to fall to 320,000 units in 2007, compared with 360,000 units in 2006 and 440,000 in 2005. Small cars are getting increasingly popular in Taiwan too, Huang said, as five of the top-10 best-selling car models on the island in the first 11 months of 2007 were compact passenger cars.

Facing Energy Challenges

Another trend in the global automotive industry, according to Huang, is the challenge of high gas prices. Higher pump prices have increased government attention to better fuel efficiency, driven sales of small cars, and spurred development of new or renewable energy sources. All of these changes have also come with new opportunities.

One such opportunity is for the development of new engine technologies that reduce fuel consumption, such as direct in-cylinder injection systems and gasoline-electricity hybrid powertrain systems, Huang said. Lightweight materials and cars running on alternative power sources, such as alcohol, bio-diesel, electricity, and solar, are other potential growth areas in the car market.

Status Quo in Taiwan

New trends in the global automobile market have been both a benefit and bane for Taiwan's own automotive industry, Huang said.

First, falling tariffs on imported cars are putting Taiwan's automobile industry, already beleaguered by falling demand (320,000 units in 2007) and plan utilization ratios (43%), under even greater pressure.

The average tariff on imported cars in Taiwan fell from 65% in 1996 to 21.8% in 2007, and it will continue to head lower. The required local-content ratio also fell from 70% in past years to 40% in 1999 and 0% in 2002. These trends are making imported cars and auto parts more competitive against their local counterparts in Taiwan.

Most of Taiwan's automakers have also traditionally been constrained by their position as the technology recipients of foreign car brands. However, Taiwanese producers are increasingly exporting cars and components to overseas markets through the sales channels of their foreign partners.

Huang also noted that the auto-parts industry in Taiwan has several competitive advantages, such as small-batch, large-variety production, high quality and relatively low priced products, rapid market response, strong R&D capability, and innovativeness. In 2006, for example, the export value of Taiwan-made auto parts was about US$4.3 billion, equal to about the amount of 310,000 complete cars, though about 80% of such sales were aftermarket (AM) products.

Some automakers in Taiwan also have world-class car development and styling design capabilities. Local car producers have set up several R&D centers, including the Yulon Asia Technical Center (YATC) established in 1998 and Yulon Nissan Design Center (YNDC) in 2007 by Yulon Motor Co. (in partnership with Nissan); the China Motor Asia Research & Technology Center (CARTEC) established in 1999 by China Motor Corp. (Mitsubishi); Kuozui Development Center established in 2000 by Kuozui Motors Ltd. (Toyota); and a design and technical center opened in 2002 by Ford Lio Ho Motor Co. (Ford).

Huang noted that China Motor has developed many Mitsubishi car models for production and sale in various overseas markets, such as mainland China, Vietnam, and Latin America.

Automobile makers in Taiwan also have superior manufacturing capability and high product quality, Huang said. Many foreign automotive experts are impressed by the quality of locally made cars and parts. Even Mercedes-Benz chose local China Motor to lead the plant-construction at a joint venture in China to locally produce Mercedes-Benz vans. In addition, he added, more and more local auto-parts suppliers have successfully tapped into global automakers' parts supply chains, upgrading the share of OEM items in exported auto-parts. The local Automotive Research & Testing Center (ARTC) set up by the government in 2001, has been providing world-class testing services for locally made complete vehicles and parts, making it faster and cheaper to develop automobiles and parts for export.

Strategies for Future Development

Huang mapped out some guidelines for local vehicle and auto-parts producers, drawing on his insight and long-term experience as a leader in the local automotive industry.

He suggested first that local automakers spend more on R&D and developing overseas markets rather than focusing just on cutting prices to win domestic market share

Huang also urged local automakers to develop export sales by setting up specific export business divisions in order to utilize excess capacity. Taiwan's small-batch, large-variety production mode, he noted, is especially well-suited for supplying the small-volume demand in certain regional markets.

Another strategy, Huang said, is to develop homegrown car models by integrating local vehicle design, powertrain systems, and key auto parts and automotive technologies. Fully homegrown brands, products, and techniques, he said, would free local automakers to set up overseas production bases, and thereby also open up new channels for local auto-parts suppliers to tap into international supply chains. Huang noted that some government-sponsored projects have been progressing to integrate the strengths of local automakers, information and communication technology (ICT) companies, and auto-parts suppliers to jointly develop homegrown cars.

Huang further suggested that the local government and private companies more actively develop electric vehicle products and small gasoline-powered cars with engine displacements under 1,000cc to win businesses at a time of high fuel prices.

Automakers should also integrate resources in Taiwan and mainland China to improve efficiency. Automakers with plants in mainland China, such as Yulon and China Motor, should introduce new car model on the both sides of the Taiwan Strait at the same time to cut costs through scale of economy.

Guidelines for Auto-parts Sector

Huang also proposed some guidelines for Taiwan's auto-parts sector, which is strong in the global AM parts market but urgently needs to join global automakers' supply chains.

First, local parts suppliers should adopt new strategies and adapt to changing market conditions. Such strategies include recruiting talented professionals, developing profit-oriented operations, and searching for new sub-contractors outside Taiwan to cut costs.

Second, local parts makers should more aggressively try to tap into international automakers and tier-one supply chains by supplying high-quality, reasonably-priced OE or OES (service) parts, noting that many big automakers are outsourcing more parts from Asia. In addition, automakers in mainland China are trying to upgrade, generating many opportunities for Taiwan parts makers with technical and cost advantages.

Third, Huang urged local companies develop more automotive electronics products, which in 2010 are expected to account for an average of 40% of a new car's value. In addition, he also suggested cross-industry partnerships between information and communication technology (ICT) and auto-parts companies to maximize the island's global-leading capabilities to create value.

Fourth, Huang urged local players to integrate available resources and upgrade them into new fields such as intelligent-vehicle and energy-saving systems and technologies. He proposed some targeted categories with strong potential, including electronic steering and suspension systems (which can cut the vehicle weight and reduce fuel consumption); intelligent LED headlamps or AFS (adaptive front-lighting) systems, headlamp orientation control systems (which adjust headlamps according to steering angle and vehicle speed); solar-power parts (such as sunroofs with solar-cell panels), advanced vehicle battery technology (such as Li-Fe batteries) and power management systems; and control units and sensors for engine management (such as fuel-injection engine management systems and oxygen sensors)