Next Step for Taiwan's Auto Parts Industry

The production value of Taiwan's auto-parts industry has been rising and reached US$5.4 billion in 2004, while the export value was about US$4.11 billion (an export ratio of about 76.1%). The rising values reflect the island's increasingly strong manufacturing capability and upgraded techniques, as well as its expanding exports. However, around 80% of the industry's sales were generated from aftermarket (AM) items, rather than advanced or superior-quality products supplied to global automakers on an original equipment (OE) basis.

"What is the next step?" is the key question facing Taiwan's makers in their quest for the sustainable development of their auto-parts lines, especially in the face of future competition from large, strong, and low-priced rivals in mainland China and India in the AM business. Few have answered or dared to answer such a serious question before because Taiwan's limited domestic automobile market could not cultivate world-class auto-parts players in the past, when the prevalence of small- to medium-sized enterprises (SMEs) in the island's manufacturing sector deterred the development of technology- and system-oriented auto-parts makers.

Some Taiwan car makers have been attempting to answer the question through access to the huge mainland China automobile market, setting up auto plants or auto-production joint ventures across the Taiwan Straits. They also are playing increasingly important roles in connecting Taiwan's auto-parts suppliers with the supply chains of major global automakers, who have been trying to cut costs amid the unprecedented, fierce price competition in the global car market, which has been caused by excessive capacity.

On the other hand, and maybe more importantly, the Taiwan government has recognized the importance and potential of the auto-parts sector in Taiwan, and has selected the line as an industry slated for special development. Over the past few years, the government has poured many resources into boosting the island's auto-parts industry, in both AM and OE arenas, including its most recent announcement that a total of NT$10 billion (US$299.9 at US$1: NT$33.5) will be devoted to prodding the development of Taiwan's automotive electronics segment over next five years. The government's move won immediate praise from private local automakers and major information technology (IT) and electronics conglomerates, which have been actively trying to find new ways to create sustainable operations, stemming mainly from continued decreases in their profit margins for computer and consumer electronics products.

As one of the few eligible industry experts to answer the question about what the next step for Taiwan's auto-parts makers should be, Jet Shu, incumbent deputy general director of the Mechanical Industry Research Laboratories (MIRL) of Taiwan's Industrial Technology Research Institute (ITRI), provides some practical answers.

Shu was formerly an engineer in the U.S. at NASA (National Aeronautics and Space Administration) and Ford Motor Co. He was invited back to Taiwan in 1989, and since then he has successfully led several R&D teams in the development of automotive engines (including 1.2L, 1.6L, 2.0L and 2.2L models), powered two-wheeler (PTW) engines, electric scooters, hybrid-power (gasoline/electric) propulsion systems, and automotive telematics systems.

Next Step: 3H Auto System Solutions

"After a long development period during which local auto-parts makers focused on the functions and the quality and performance of their products," Shu points out, "Taiwan's auto-parts line, using its accumulated technical strength, has to make a big jump to another stage-from customers' needs to customer wants. That gives the industry a clear direction, which is toward value creation."

"More practically, the products in this new stage should be "3H" (high barrier, high value, and high integration) auto-system solutions," Shu continues, "which are based on a company's (or the government's) strong intention to become an original equipment manufacturing (OEM) solution provider. To succeed in 3H manufacturing, a company must drive innovation to become a state-of-the-art front-runner."

Giving an example, Shu explains that in the past and up until the present, the greatest majority of water pumps and oil pumps used in automotive engines have been pulley-driven. "A company can try to develop electronically driven water and oil pumps for engines. This is a value-creation move, but the products of course have to be reliable enough," he says.

In the recent past, according to Shu, Taiwan's auto-parts makers have stayed in a tangible-asset area by focusing on manufacturing. "Google, for example, has entered a intangible-asset area by constantly creating new values," he points out, "and Taiwan should evolve-as soon as possible-away from being a function and quality/performance oriented manufacturing base (please see Chart 1) to the next stage, which is developing strong branding and front-runner status."

"In the stage of branding and becoming a front-runner," Shu continues, "integration plays a vital role. Most people neglect integration and treat it as a simple work, which is wrong. Integration involves so many angles, and integration can involve so many innovations. The final goal of integration is to create value."

For example, Shu says, integration involves cooperation, intents, culture merging, and technical innovation. When you integrate the 3C (computer, communication, and consumer electronics) business with auto parts manufacturing, Shu explains, cultural merging is important because the product life cycles of 3C and auto-parts products are so different.

For the integration of technology innovation of the 3C and auto-parts lines, Shu says, another big difference pops up immediately. The 3C line pursues innovation to catch young and curious customers, but the auto-parts sector depends much more on reliability. Another example is that most 3C products target specific consumer age groups, but a car model may be driven by drivers ranging from 18 to 85 years old.

Strategy to Intents

Shu also draws a business-model table for auto-parts companies that want to jump from traditional manufacturing into branding and becoming front-runners (please see Chart 2), in which several factors (Leadership, Customer, Competitor, and Core Competence) contribute together to the formation of a Strategy, and the strategy leads to a company's Intents.

Citing as an example a company that plans to enter the telematics business in next-stage segments, Shu points out that Leadership requires several features, including ICT (IT and communication technology) key networks, auto-domain knowledge (must be an action carrier), a system integrator, and a service business model.

The Core Competence of the newcomer, then, requires capabilities in auto-product R&D, ICT and automotive integration, facility, and validation. When the company owns the required core competences, Shu says, then the Customer will have two options: OE and AM manufacturing. The Competitor might be Denso, Panasonic, or others, and the Strategy should be to "narrow down the gap between Competitors and Core Competence to meet or exceed the Customer requirement.

Intents, according to Shu, are generally the 3H (high-barrier, -value, and -integration) auto system solutions. Detailed intents should be to become an OEM solution provider, and to become a front-runner that drives state-of-the-art innovation.

Solid Basis

Shu points out that Taiwan has poured many resources into auto electronics and has achieved some fruitful results, which is the solid base, or the Core Competence listed in Chart 2, for setting strategy and forming intents by local auto-parts suppliers.

There are several major sectors of the automotive electronics business, Shu says, including the engine/power train, chassis/suspension, safety, body (air conditioner, power seat, and power sunroof ), infotainment (information and entertainment, such as telematics, navigation, and multimedia), and security areas.

"In the past 10 years, Taiwan has developed its own automotive-engine platforms, engine management systems (EMS), electric-scooter motors, motor controls, generators, and hybrid engine vehicle (HEV) energy management systems for the engine/power train category," the industry expert says. "For chassis/suspension automotive electronics, the island has also developed its own adaptive suspension system; while for infortainment category we also have developed home-grown telematics systems, and the product is onboard unit (OBU)-ready."

Most of these achievements, in fact, were R&D project results achieved by teams at MIRL that were subsidized by the government or in cooperation with private manufacturers.

"We have had initial achievements in the most difficult fields of automotive electronics," Shu claims, "and what is left to be accomplished in the next step will be establishing our companies' intents and customers."