Taiwan's AM Auto Parts Makers Eye Bigger Role as OEMs

The new year of 2010 has come in with signs of recovery in the global automotive industry as the world economy emerges from its coldest winter in many years. Thanks partly to the stimulus programs that were introduced to boost auto demand in various countries, and partly to recovering consumer confidence, worldwide shipments of new cars continue to grow and are expected to reach pre-financial-tsunami levels soon.

The global demand for aftermarket (AM) auto parts, however, was only minimally affected by the financial turmoil, because the hard times encouraged people to hold onto their old cars—and to buy the parts needed to keep them running.

All signs are pointing to improved opportunities for Taiwan's auto-parts makers, who supply a major share of the world's high-quality, reasonably priced aftermarket (AM) auto parts. In the United States, for example, they account for a big share of the collision replacement parts sold. With a small domestic auto market (about 290,000 new cars sold in 2009) that has long depended on foreign technology, local auto parts makers have been looking for growth beyond Taiwan's borders. In addition to the AM market, they are muscling up in the more lucrative original equipment (OE) segment, seeking a stronger foothold in the supply chains of international auto brands.

The continuing demand for replacement parts kept most of Taiwan's AM auto-parts suppliers safe during the recession, and some of them, such as the Tong Yang Group, have even announced aggressive capacity expansion projects at different production bases worldwide. Manufacturers will also benefit from the recent global upturn in new-car sales.

Another force driving global demand for AM parts is climate change. With extreme weather increasing everywhere—frequent flooding, unusually low temperatures, unprecedented amounts of snowfall, torrential rains—accidents have increased, bringing extra demand for parts—especially collision replacement parts.

Most AM parts makers in Taiwan reported record monthly sales in the last few months of 2009 and early 2010. The expectation of continued strong demand is also driving some world-leading Taiwanese parts makers to further expand their business deployment.

Soon after announcing that its flagship firm Tong Yang Industrial Co. and affiliate Taiwan Kai Yih Industrial Co. would merge in September 2010, for example, the Tong Yang Group, one of the largest auto-parts conglomerates in Taiwan, recently revealed that it would pour NT$2 billion (US$615.4 million at NT$32.5:US$1) into capital spending in 2010. The money will be used to expand the capacity of seven group affiliates.

Tong Yang Industrial is the world's largest supplier of plastic AM auto body parts, and a major supplier of OE body parts to all top automakers in Taiwan and China. Kai Yih is a major producer of AM sheet-metal body parts, with subsidiaries and joint ventures in China that supply OE parts to carmakers there.

These moves by the Tong Yang Group indicate that after having gained a solid foothold in the international AM market by driving rivals in other countries out of the business, major Taiwanese players are aggressively expanding their capacity and diversifying their product lines so as to further boost their market shares.

The OE Business

The worldwide increase in new-car sales is also pumping up business for a growing group of original equipment (OE) auto-parts suppliers in Taiwan. For the island's auto parts makers, the silver lining in the global economic meltdown was redoubled efforts by automakers to cut costs, a trend on which Taiwan's competitive-cost, high-quality suppliers are well poised to capitalize.

Only about 20% of the auto parts made in Taiwan are destined for the OE market, but that ratio has been growing in recent years as producers improve quality and keep prices competitive. This has endeared them to cost-cutting automakers and tier-one parts suppliers in Europe and the U.S.

And even in the most difficult of economic conditions, it seems that local OE parts makers can profit from their vaunted small-batch, large-variety production mode, winning orders from foreign automakers for relatively small-volume car models that lack the economic scale of big-volume production.

Tapping into the supply chains of automakers and tier-one parts suppliers is not an easy task, since automakers and major parts suppliers are often joined at the hip. But automakers' supply chains sometimes break down, and this is expected to help Taiwanese producers win a growing share of OE orders. This will open a new door for local suppliers who want to expand beyond the saturated domestic market. In the past few years increasing numbers of prominent first-tier parts suppliers filed for bankruptcy, offering more business opportunities to local companies that can compete in both quality and price.

Parts suppliers in Taiwan are also boosting their exports of OE parts, especially to the overseas plants of Japanese automakers in the Association of Southeast Asian Nations (ASEAN) area and mainland China.

Among the tier-ones that now outsource production to Taiwan or cooperate with local partners to cut costs are many of the biggest names in the industry, such as Visteon, Dana, Delphi, and Magna.

After a period of joint product development and mutual adaptation, local partners are shipping increasing amounts of parts to carmakers and tier-one customers worldwide. Among those seeing sales gains from this business are the TYC Brothers Industrial Co., Fine Blanking & Tool Co. (FBT), Hota Industrial Manufacturing Co., Chian Hsing Forging Industrial Co., Macauto Industrial Co., Tung Thih Enterprise Co. (TTE), and China Metal Products Co.

EV Fever

Another positive force for the auto-parts industry is the global electric vehicle (EV) fever. Many companies in Taiwan have been able to secure a leading position among parts manufacturers by supplying lithium-ion battery packs, electric motors, and key parts of power control units to international EV makers.

Taiwan-made parts now are seen in many prominent battery electric vehicle (BEV) models, including the BMW Mini-E, Tesla Roadster, and top-end Fisker sports car, and will be adopted by an increasing number of models offered by other automakers that want to be in on the inevitable trend toward EVs.

In addition to the vigorous efforts exerted by private companies over the past few years, Taiwan's government has also been promoting the rapid development of EV-related industries on the island through various R&D-subsidy programs. In addition, the government has been commissioning domestic research institutions to help develop newer and better technologies for transfer to the private sector, aiming to make Taiwan into not only a good market for EVs, with a well-established recharging infrastructure, but also an important supply base for EV-related key systems and parts.

Some of Taiwan's assembled-vehicle makers have introduced their own BEVs, and some are planning to promote other types of EVs such as plug-in hybrid electric vehicles (PHEVs) and hybrid electric vehicles (HEVs). The domestic EV-related parts sector is also expected to grow rapidly over next few years, adding a new dimension to the development of the island's auto-parts business.

Automotive Electronics

With the strong support of Taiwan's world-class electronics and information and communication technology (ICT) industries, Taiwan auto parts producers are also pulling ahead on the innovation front, supplying advanced automotive-electronic systems and components to global customers at reasonable prices.

An increasing number of advanced automotive-electronics systems have been developed by local auto-electronics companies, who are eyeing not only domestic carmakers but also the huge market in China.

The Hua-chuang Automobile Information Technical Center Co. (HAITEC), a subsidiary of Yulon, Taiwan's largest automaker, is playing a leading role in the development of the local automotive electronics sector. With support from the government and domestic research institutions, HAITEC has developed several car models packed with advanced electronic systems.

Local companies have made significant headway in both the OE and AM segments of the auto-electronics market over the past year. Among the world-class products they supply are tire pressure monitoring systems (TPMS), telematics on-board units (OBUs), charge-coupled device (CCD)/complementary metal-oxide semiconductor (CMOS) cameras, thin film transistor-liquid crystal displays (TFT-LCDs), engine control units (ECUs), AC/DC converters, light-emitting diode (LED) lamps, portable navigation devices (PNDs), and night-vision systems.

Competitive Advantages

Supported by a comprehensive and highly efficient central-satellite plant system, which enables individual suppliers to specialize in certain fields, Taiwan's auto parts suppliers enjoy a high level of production flexibility, broad product range, low production costs, and fast development time.

Another advantage of local auto parts makers is their division-of-labor manufacturing networks in Taiwan, mainland China, and other countries. With plants on both sides of the Taiwan Strait, producers can meet a wide range of customer needs in terms of pricing, quality, quantity, and lead times.

A third advantage is Taiwan's specialization in a small-batch, large-variety production, enabling high efficiency, flexibility, improved management, and cost control.

In this new year of 2010, Taiwan's auto-parts makers are ready for further business advancement. The advantages mentioned above, plus the core competitiveness of its auto-parts industry, without doubt make the island the best choice for global buyers at a time when cost/performance (C/P) value is the key to success.