28 Sept 2009
Inspection Certificate
Executive Summary
The mainland is now the fourth-largest automobile producer, and the third-largest market in terms of production and sales volume respectively in the globe. Demand for automobiles is set to rise further on the back of a number of favourable factors, including continued growth in highway infrastructure, growing mobility of people, increases in freight transport and the extremely high ratio of persons per automobile on the mainland. While the recent macroeconomic tightening measures may have a short-term impact on the mainland's automobile market, the medium- and long-term prospects remain promising. Automobile assemblers, as well as various auto part and accessory suppliers and their sub-contractors, should make long-term commitment to tap the mainland market.
A Boon to Auto Part and Related Industries
Backed by increasing demand on the mainland, the annual automobile production of over four million has elicited robust input demand for a comprehensive range of auto parts and accessories, spanning from metal items, plastic and rubber parts to electrical and electronic devices. As an automobile is composed of thousands of items, which are produced by over 50 industries with different expertise, the spill-over effects of the automobile production growth should benefit not only suppliers of direct auto parts, but also a wide range of component suppliers and sub-contractors in different industries. On the other hand, mainland's vehicle ownership, driven mainly by sedan and passenger car segments, has exceeded 23 million units, nearly doubling the 1998 level of 13 million. As the ownership level is expected to rise further, demand from the aftermarket for spare parts for repair and maintenance is set to continue to increase.
Emerging Opportunities in the Supply Chain
Not surprisingly, the automobile supply chain is highly organised with players operating like a cartel, making it difficult for newcomers to penetrate into the market. But the mainland's industry is under restructuring and consolidation, due mainly to challenges stemming from market opening under China's WTO commitment.
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A case in point is that the mainland will remove its import quotas imposed on automobiles and auto parts and accessories completely by 1 January 2005. |
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It is also set to lower import tariffs on automobiles to a maximum of 25%, and to reduce tariffs on auto parts and accessories to an average of 10% by 1 July 2006. |
In the process, the substantial lowering of import tariffs, especially on automobiles, has already intensified competition in the market. Both the domestic and joint venture assemblers are pushed to review their supply chains in order to improve product quality, while minimising costs by enhancing their sourcing from quality but competitive suppliers. Such pressures are likewise passed up the supply chain from assemblers to first-, second- and third-tier suppliers. As a result, a re-alignment is happening in the supply chain, in turn creating leeway for new but competent, competitive suppliers.
Getting Ready to Meet Stringent Requirements
It should be noted that stringent quality and reliability are the common requirements of the automobile industry, as a single small defect may cause a costly production problem in the supply chain. Obviously, barriers to entry into the supply chain are high. But suppliers will enjoy stable orders and higher profit margins, once they are able to lock into the supply chain.
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Requirements on Suppliers : |
Up-side Benefits : |
| Have good track records | Face lesser competition as long as they become the incumbents |
| Have sound financial background | Come under the protection of the barriers |
| Have certified quality management systems | Enjoy stable business |
| Accept long vendor selection/product approval processes | Enjoy higher profit margin |
| Meet just-in-time production requirements | |
| Indemnify assemblers in case of delay and quality problems |
Hong Kong's Position and CEPA
Although the automobile industry does not perceive Hong Kong as a reputable auto part player, in fact there are a number of companies already tapping the auto part market. In 2003, Hong Kong's exports of auto parts and accessories amounted to over HK$10 billion, with major markets including not only the mainland, but also advanced countries like the US, Japan and Germany. They are able to meet the stringent requirements of not only certain auto electronics, but also some direct parts and accessories for vehicles. Hong Kong is therefore in its element to tap the booming input demand from the mainland's automobile industry. CEPA, which includes certain auto and auto-related parts and accessories, serves to further facilitate sales to the mainland.
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The Second Phase of CEPA (CEPA II) While some Hong Kong products with existing production in the territory can enjoy duty-free access to the mainland, some other products without current production in Hong Kong will also enjoy the same benefit under CEPA II to be implemented from January 2005. This includes some items specified for use in automobiles, such as toughened safety glass for vehicles and air-conditioning machines used in motor vehicles. These products have been put under CEPA on the request of Hong Kong companies, probably lured by the booming market on the mainland and the viability to undertake production of such items in Hong Kong under the scheme. |
Tapping Market Niches
Both input and aftermarket demand for different auto parts and accessories should increase proportionately along with increases in production and sales of automobiles. Additional demand is also set to blossom due to some salient market features and the development of certain market trends on the mainland, thus creating new market niches for Hong Kong companies.
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Under-application of Electronic and Electrical Devices |
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Sales of electrical and electronics parts account for only 8.5% of total auto part and accessory sales on the mainland, much lower than the international level, thus revealing further room for growth of auto electronics and electrical products. | |
| - | Current demand : electronic ignition; power supply; burglary alarm/central locking systems; wipers, defrosters, etc.; motor-driven glass elevators/seats; wiring systems; car batteries; air-conditioning machines; lighting systems | |
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- | Expected new demand : electronic suspension systems; ABS with electronic stability; adaptive airbag systems; adaptive cruise controls; radar and sensors for parking assistance; LCD or other display modules |
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Rising Demand for In-car Entertainment and Communication Equipment |
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Entertainment equipment is increasingly purchased by sedan owners in order to make driving fun, while navigation apparatus is welcomed by long-haul drivers and transport companies for positioning and keeping track of their vehicles. |
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| - | Demand for in-car entertainment : car radios; CD/DVD players; TV tuners; TFT LCD/OLED monitors; sound speaker systems; automatic power antenna | |
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- | Demand for communication and navigation apparatus : GPS systems and apparatus; satellite/radio antenna; radio transmission/reception apparatus |
| Concerns over Air Pollution and Emission |
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In view of concerns over air pollution, auto parts and accessories that can make energy consumption more efficient, while minimising emission, are sought after. |
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| - | Potential demand : end-of-pipe dust traps and air filters; efficient vehicle fuel catalyst converters; cleaner fuel alternatives and additives; environmental combustion engines and related parts | |
| Polarisation of Supplies in the Aftermarket |
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While original spare parts are relatively expensive, alternative spare items made by local enterprises are selling at very low prices but are of low quality. Medium-priced quality spare parts account for only a small portion of the sales in the aftermarket. | |
| - | Demand for competitive but quality spare parts : metals - aluminum alloy wheels, clutches, seat frames, door locks, tyre valves, water tanks, pipes, etc.; plastics - steering wheels, interior fittings, windscreen wipers, rubber seals, other rubber parts, etc.; electronics/electricals - lamps, batteries, cable harnesses, ignition coils, etc. | |
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- | Demand for equipment and accessories : decoration/beauty products; cleaning apparatus; car chargers; seat assemblies; mirrors and safety glass |
Major Recommended Strategies
Certainly, the mainland is a lucrative market for Hong Kong's auto part and accessory suppliers, as well as companies of various industries that are related to the production of auto parts of different technology and expertise. Unlike the consumer goods sector, however, the automobile supply chain is highly organised with stringent entry requirements. To effectively penetrate into the market, Hong Kong companies need to formulate appropriate strategies according to their strengths and weaknesses, while observing the market and competitive environment.
| Opportunities stemming from robust production & market opening |
- HK companies can approach not only assemblers, but also first-, second- and third-tier suppliers for business.
- Aftermarket can be one of the target segment for competitive suppliers.
- Both local and foreign-invested enterprises, which are subject to intensified competition, are potential clients
| Market opening under China's WTO commitment |
- Further re-structuring of the supply chain will create leeway for new but competent, competitive suppliers.
- But newcomers have to act now, as auto part and accessory suppliers and sub-contractors will lock into different supply chains tightly after the restructuring.
| Penetration into regional markets |
- Major automobile production bases, including Jilin, Shanghai and Hubei, should be among the targeted markets.
- But provinces with smaller auto part/accessory output share rely more on "foreign" auto part suppliers : e.g. Jilin, Hubei and Guangdong.
- Stringent requirements in more competitive Shanghai, for example, make it the market mainly for more advanced suppliers.
| Just-in-time production and geographic consideration |
- Given that geographic proximity is among the important elements in the supply chain, Hong Kong companies with production facilities in the PRD may first consider tapping the demand in Guangdong.
- Apart from direct investment in and cooperation with partners in other provinces, more efficient logistics management is to some extent the key to overcome the problems of geographic remoteness to other regional markets.
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| ABC COMPANY LIMITED
Rm 123, Hope Plaza, 18 Hope Road, Wanchai, HONG KONG
INSPECTION CERTIFICATE
Date: 15/10/98 We hereby certify that the following merchandise which are ready for shipment have been duly inspected by our representatives and made up in accordance with all the requirements as order specified. Commodity(ies): "SME" BRAND MODEL-l38 RADIO
FOR AND ON BEHALF OF ABC CO., LTD.
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