China's Auto Suppliers Need Greater Investment in Business Systems; AIAG/IBM Study Outlines Intense Battle Ahead in China's Automotive Sector

SOUTHFIELD, Mich., May 19, 2004 -- As China's automotive suppliers rush to meet the demands of the world's fastest-growing automotive market, an overcapacity problem already may be brewing, according to a new study written by Economist Corporate Network and released today by the Automotive Industry Action Group (AIAG) and IBM Business Consulting Services' Institute for Business Value. The quest to add manufacturing capacity is taking place at a faster rate than expected market growth, raising overcapacity concerns and the possibility of a shakeout within five years.

In pursuit of lean operations, automakers worldwide have focused on investing in technology. The China Auto Suppliers Survey looked at how China's automotive suppliers make use of process and production technology.

The study found that IT spending by automotive suppliers in China was generally low, with more than three-quarters of respondents investing less than $100,000 per year. It also examined major concerns, including an overwhelming need to find and retain good staff, which was cited by survey respondents as a barrier to successful development. When it comes to automating operations, less than a quarter of respondents use enterprise resource planning (ERP) systems.

"This study makes it clear how standardization of business process and technology could catapult China into a crucial position in the global automotive industry," said Andrew J. Cummins, executive director of AIAG. "Specifically, the research suggests the urgent need for suppliers in China to embrace common criteria, benchmarks and tools for business process and performance in order to achieve the cost-competitiveness they seek."

While the building blocks of advanced manufacturing concepts such as vendor-managed inventory are hardly present in China, more than two-thirds of companies surveyed said they want to improve their business processes in order to engage in inventory management, more accurate production planning, and tracking through bar-code labeling.

The study concludes that China's domestic companies and joint ventures alike perceive cost-competitiveness -- not quality -- as a significant barrier to increased exports, and that it may be a question of production efficiency and economy of scale.

More than half of respondents plan to increase annual manufacturing capacity by more than 20 percent over the next five years, and just one in five expects market demand to equal that rate of growth. Moreover, Chinese domestic automotive suppliers are focused on export to Southeast Asia, while foreign joint ventures plan exports to North America and Japan, as well.

"This study reveals extraordinary developments in the region's automotive industry -- and the volume of response suggests China's automotive suppliers are both aggressive and ambitious in their efforts to become an engine for global industry," said Dan Blake, Global Automotive Industry Leader, IBM Business Consulting Services. "A critical success factor will be the extent to which they invest in the infrastructure required to make the engine a cost- competitive proposition."

The survey, conducted by Economist Corporate Network, polled nearly 300 respondents serving the light-vehicle market in China -- cars, light trucks and buses up to 3.5 tons. The survey gathered insight into the forces fueling industry growth, as well as respondents' plans to manage and resolve market challenges. Of the suppliers surveyed, 57 percent were purely domestic Chinese companies and 43 percent were foreign joint ventures. AMT, a firm specializing in Chinese market research, carried out the research in Chinese, in February 2004.

About AIAG

Founded in 1982, AIAG is headquartered in Southfield, Mich. Its member companies include North American, European and Asia-Pacific OEMs and suppliers to the automotive industry with combined annual sales of more than $850 billion. A not-for-profit association, AIAG's primary goals are to reduce cost and complexity within the automotive supply chain and to improve speed- to-market, product quality, employee health-and-safety and the environment. Additional information is available on the Internet at www.aiag.org .

About IBM Business Consulting Services

With consultants and professional staff in more than 160 countries globally, IBM Business Consulting Services is the world's largest consulting services organization. IBM Business Consulting Services provides clients with business process and industry expertise, and the ability to translate that expertise into integrated, adaptive, on-demand business solutions that deliver bottom-line business value. For more information, visit: www.ibm.com/bcs .

The IBM Institute for Business Value develops fact-based strategic insights for senior business executives around critical industry-specific and cross-industry issues. This research is a part of an ongoing commitment by IBM Business Consulting Services to provide analysis and viewpoints that help companies realize business value. To learn more, send an e-mail to iibv@us.ibm.com .

About Economist Corporate Network

Since 1981, Economist Corporate Network has provided critical business intelligence to senior executives in Asia Pacific. Through timely insights and analysis that only The Economist Group can provide, this elite network of resources, experts and peers has aided both newcomers and seasoned Asia Pacific hands prosper in the region. On site insight at http://www.economistcorporatenetwork.com/ .