Industry News

Supplying Auto Parts to the World

Thanks to a strong economy and falling automobile prices, more and more consumers in China are plunking down money for their first car. With 20 percent annual sales growth expected through 2007, China is on track to become the world's third-largest market for autos, after the United States and Japan. One company that seems well positioned to tap into this growth is Wanxiang, China's largest maker of auto parts.

Wanxiang started out in 1969, with barely $500 in capital, as a repair shop for bicycles and farm tractors. Now it is China's third-largest privately owned company. Wanxiang, based near Hangzhou, in Zhejiang province, controls or has stakes in 100 companies, both in China and overseas, that deal primarily in auto parts. Last year, it earned $165 million in pretax profits on $1.8 billion of sales, including $380 million in parts exported or produced abroad. The company employs 31,800 people, 920 of them in the United States and Europe.

There are challenges, however. A global glut of production capacity is forcing automakers to put heavy pressure on suppliers to reduce costs. In China, seven new companies have entered the auto market since 2001, and several more have announced plans to do so. Once this new production capacity comes on line, utilization at auto factories with foreign investment could dip below 60 percent, so automakers would put even more pressure on their suppliers to reduce prices. And although Wanxiang does have a labor cost advantage over many of its auto parts competitors in the West, they have strengths of their own, such as more advanced technology and much larger scale.

But Lu Guanqiu, Wanxiang's founder, continues to see opportunity in the face of difficulties. For the past several years, he has been on an acquisition spree, buying auto parts makers in the United States and Europe to plug gaps in his company's technology, markets, and brands. To tap into businesses with higher profit margins and funnel funds back into the core auto parts business, Wanxiang has also acquired stakes in several services firms. In addition, Lu is hatching plans to fuel growth and profits by building a complete automobile, with the ultimate goal of manufacturing autos bearing the Wanxiang brand. An important part of his strategy is the development of an electric car, which he hopes will help address the problems of higher fossil-fuel consumption and air pollution. Whether or not he eventually succeeds in moving his company up the value chain, Lu is still committed to his core auto parts business: "As long as cars are being made somewhere in the world, we'll be making parts."

Lu Guanqiu discussed his company's prospects in an interview with Paul Gao, a principal in McKinsey's Shanghai office.