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The engines of global outsourcing, mergers and acquisitions are likely to power a further increase in the shares of China's biggest publicly traded makers of auto parts, analysts say.
"Outsourcing is accelerating," says Charles Cheung, an analyst at Citigroup in Hong Kong. U.S. and European auto makers are hunting for lower-cost production, he says, while Chinese companies are "looking for overseas acquisition targets." The trend is starting to fuel some listed parts makers, such as Minth Group and Fuyao Group Glass Industries.
In a sign of the growing demand for Chinese-made components, a senior General Motors purchasing executive said during a visit to Beijing last week that the giant car maker would sharply increase the volume of parts it buys from Fuyao and other Chinese suppliers.
Bo Andersson, vice president for global purchasing, said he expects GM's parts purchases in China to rise by an average of 25% annually until 2010. On average, GM now ships about 20 million components a month from China to plants in other countries, he said.
GM isn't alone. Ford Motor has opened a research-and-development center in Nanjing that is focused, initially, on helping expand the company's use of parts from lower-cost Chinese suppliers and working with local firms to improve quality and reliability. Other global auto makers from the U.S., Europe and elsewhere in Asia are also stepping up purchases of Chinese-made components.
As Chinese component manufacturers grow in size and ambition, they are seeking acquisitions to speed expansion and give them access to better technology. Companies such as Wanxiang Group have acquired U.S. companies, and others say they are looking to do the same.
Of course, there are risks. The prices of steel, petroleum products and other raw materials have risen sharply, putting pressure on parts makers' profit margins. The strengthening of the yuan, which makes Chinese products more expensive in U.S. dollars, is another possible difficulty.
The flip side of the stronger yuan is that it could bolster the ability of Chinese companies to purchase overseas assets, especially in the troubled U.S. auto-parts industry. Still, any potential bids would face competition from the private-equity and vulture investors now circling wounded U.S. companies.
Citigroup's Mr. Cheung and other analysts say the better component manufacturers will thrive despite unfavorable shifts in exchange rates and input prices. Mr. Cheung says a weaker U.S. economy also could benefit Chinese parts suppliers, as American auto makers will be under greater pressure to find lower-cost producers than those at home.
"China has an advantage in these labor-intensive businesses like auto parts," says Han Yinhua, an analyst at Industrial Securities in Shanghai. "We could see many suppliers with overseas orders benefit."
One of the companies most likely to gain from the rising tide of sourcing is Fuyao Glass. Based in the southern city of Fuzhou, the company lists yuan-denominated A shares, primarily for domestic investors, on the Shanghai Stock Exchange. The company is a supplier for GM, Ford and Volkswagen's Audi brand.
GM's Mr. Andersson singled out Fuyao to reporters as a company that could see more business from the U.S. auto maker. He said the company has the potential to become one of GM's five biggest glass suppliers within five years.
"Fuyao will absolutely benefit more" from rising sales to international car makers, predicts Zhu Xuedong, another Industrial Securities auto analyst.
Yesterday, shares of Fuyao closed at 27.99 yuan ($3.78) each, or 90% above their level at the start of 2007. For the same period, the Shanghai Composite Index is up 84%.
One of Mr. Cheung's favorites is Minth, which is listed in Hong Kong. It makes interior fittings and structural components for GM, Ford, Toyota Motor, Volkswagen and Hyundai Motor among others.
In late August, Mr. Cheung reiterated his "buy" recommendation on Minth after seeing the company's profit margins widen in the first half of the year. Minth's sales are primarily domestic -- it supplies the China operations of international manufacturers -- but it also exports. In the first half of the year, 16% of sales went abroad, according to Citigroup.
Mr. Cheung says increased outsourcing will help drive Minth's growth in coming years
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