Integration: The Way Out for China's Automotive Aluminum Wheel Industry

Abstract: China's auto aluminum alloy wheel industry has grown rapidly with the rapid development of Chinese autos. From 1 in 1988 to over 80 today, only a short period of 19 years.

However, the industry concentration is low, and the scale of production and technology are uneven. With the slowdown in the growth of the auto market, the impact of negative factors such as rising prices of raw materials and appreciation of the renminbi, some companies will face another “severe winter” after 1997; at the same time, the huge growth potential of the domestic market and the global procurement of European and American auto manufacturers For the "dark horse" in the industry, it provides a golden opportunity for expansion. In response to market development, mergers, reorganizations, and integrations were carried out by companies with strong overall strength to form several large-scale enterprise groups, thereby realizing large-scale production and operations, and making China a manufacturing powerhouse with a large aluminum wheel hub.

1 Industry Status and Problems

China's auto aluminum alloy wheels started later but developed rapidly. Since 1988, the production line with an annual output of 500,000 pieces in China was born in Qinhuangdao Deckar Wheel Manufacturing Co., Ltd. There are more than 80 enterprises specializing in the production of aluminum alloy wheels in China, and the annual production capacity has been expanded to 50 million. According to the product use classification, it can be divided into the complete vehicle matching market (OEM) and after-sales service market (retail); according to the country can be divided into domestic OEM market and domestic retail, international OEM market and international retail.

However, like most of China's auto parts industry, of the more than 80 aluminum wheel manufacturers, there are only 9 of them with an annual output of more than 2 million, a certain scale, and a stable market. In addition to the large-scale, relatively strong companies that divided up the domestic OEM market, and some companies export to the major international OEM market, most manufacturers mainly supply domestic and foreign retail markets. The entire industry is in a scattered, chaotic, and poor state, and the industry concentration is very low, which is not conducive to the large-scale industrial development of aluminum wheels.

Aluminum wheels are relatively mature products. Since 2002, the “blowout” situation in the domestic auto market has attracted many industry players to follow up quickly. This has led to the rapid expansion of the total capacity of aluminum wheels. With the slowdown in the growth rate of the auto market, the rise in raw material prices and the appreciation of the renminbi, the profitability of some aluminum wheel enterprises has begun to decline, resulting in excess production capacity.

At the same time, in developed countries such as Europe and the United States, the pressure of cost has forced multinational auto companies such as GM, Ford, and Dai-Ke to turn to low-cost countries and regions including China for procurement, and global procurement of auto parts including aluminum wheels. Industrial transfer provides a golden opportunity for companies with growth potential and market development capabilities in the industry. These industry leaders and “dark horses” urgently need to expand their production scale, and take advantage of cost advantage to seize the favorable position of the international OEM market. For example: Daica invested in the construction of several production lines; Liufeng invested in the construction of 3 million light alloy (Kunshan) production lines in 2002; Wanfeng Auto was listed in November 2006 to raise funds, preparing to build a new 2 million production line.

These conditions will exacerbate industry competition, make the strong stronger, weaker weaker, and cause great waste of industry resources. If the core hub enterprises integrate industrial resources through joint ventures, cooperation, mergers and other means to form professional and large-scale enterprise groups, can it be a better way for the development of the aluminum wheel industry? The following will further analyze this issue.

2 Opportunities and Challenges for the Development of the Industry

2.1 Opportunity Analysis

(1) The globalization trend of the international auto industry has provided new development opportunities for China's spare parts industry. In order to enhance its competitive advantage, multinational corporations optimize the allocation of resources globally, and compress costs in R&D, production, procurement, and logistics. Among them, the trend of shifting parts and components to low-cost and developing countries is increasing. Aluminum alloy wheels are resource-consumption products, manufacturing costs remain high, automotive OEMs are facing a lot of cost pressures, is one of the parts to achieve global procurement earlier. In particular, in the larger global automotive market, the United States, GM, Ford, and Chrysler managed to reduce costs by increasing oil prices, sales decline, and the gradual eroded by Japanese brand cars. Since 2002, they have been pursuing large-scale purchases from China. Wheel hubs are products that the three major companies have achieved earlier and faster purchases in China. This situation has provided an unprecedented opportunity for the development of the growing automotive aluminum wheel industry in China, bringing the best in the industry to the historic opportunity of entering the world's larger OEM market. In accordance with the current multi-level pyramid supply model of the automobile industry and the global commodity chain theory, to become a first-tier supplier of vehicle companies, to win a better supporting position and market opportunities, you can participate in the simultaneous development of new models. And design has far-reaching implications for rapidly improving the supplier's technology and management level. At present, GM has brought great rewards to Dika and Liufeng; Ford announced that Dyka has become one of the few global strategic cooperation suppliers.

(2) For domestic parts and components companies, the rapid development of the domestic auto market over the past decade has provided excellent development opportunities and guarantees. Especially after joining the World Trade Organization, the demand for cars in China has increased dramatically. The passenger vehicles that grew faster were 58.3% in 2002 and 70.6% in 2003, and remained at double-digit growth rates for several years. The growth rate of cars in passenger cars is faster. The demand for cars was 800,000 five years ago. In 2006, it reached 4 million, an average annual increase of 37.5%. This growth rate is almost rare in the world. Judging from the consumption of automobiles, the consumption of new cars in China in 2002 was 3.24 million, ranking fourth in the world. Ranked third in the world in 2004, slightly lower than Japan in 2005, and surpassing Japan in 2006, reaching 7 million vehicles. According to experts' estimation, the large number of cars entering the family means that middle-income families have the ability to purchase cars around around 2009. In 2010, China's domestic automobile sales volume will reach the level of 10 million vehicles, reaching 20 million in 2020, surpassing the United States, and becoming the world's largest new car sales market (Data: China Automotive New Network). According to the loading rate of domestic automotive 50% aluminum alloy wheels, by 2010, the domestic OEM market for aluminum wheels will be approximately 20 million. This will be a development opportunity that makes aluminum wheel manufacturers in other countries very envious.

(3) China's auto industry policy encourages component companies to develop in scale and professionalism. For the parts and components manufacturing enterprises that can support and enter into the international auto parts procurement system for a number of independent vehicle companies, the state will provide priority support in terms of technology introduction, technological transformation, financing, and merger and acquisition.

The above is a brief analysis of the development opportunities of China's aluminum wheel industry from three aspects of international and domestic market demand and industrial policy. It can be seen that these opportunities are golden opportunities for the development and expansion of China's core aluminum wheel companies that have relatively competitive advantages in the world, and they are also favorable opportunities for the entire aluminum wheel industry to effectively allocate resources and achieve healthy development.

2.2 Risk Analysis

(1) After China's accession to the WTO, the opening up of the market and the global procurement of multinational auto companies have provided China's powerful companies with access to expand market space, but also built bridges for overseas competitors to enter the Chinese market. For example: BBS, the main supplier of aluminum wheel OEM in the German market, established a joint venture in Binzhou, Shandong, with a production capacity of 1 million units in the first phase; US PRIME has independently built 2.5 million automated production lines in Kunshan; Taiwan Yuanheng established a source of 1 million in Suzhou As a company... These overseas companies’ main objective of moving to mainland China is to focus on the golden opportunity for the development of domestic autos, in addition to reducing labor costs and other factors.

It can be seen that domestic aluminum wheel companies must first achieve market share in the domestic market, especially the OEM market, before exploiting the international market, and use existing advantages and cost advantages to form barriers to entry. If you can form a corporate group or alliance, overseas competitors are difficult to enter.
Therefore, "dancing with wolves" is not terrible, and better defense measures are still integrated in the industry.

(2) The aluminum alloy cost and energy cost account for more than 50% of the total hub manufacturing cost. The continuous rise of aluminum ingots and energy prices has increased the cost of aluminum hub manufacturing enterprises. At the same time, both domestic and foreign vehicle manufacturing companies face enormous pressure to reduce procurement costs and increase sales profits, and often force aluminum wheel suppliers to cut prices. Both upper and lower extrusions reduce the profits of aluminum wheel companies and increase business risks. However, this risk is aimed at the global aluminum wheel industry, where individual companies take risks equally. If an enterprise group headed by a core company is established through industrial integration, it can exert its technological advantage. Through the improvement of technical processes, it can reduce the consumption of raw materials and energy to a certain extent, thereby reducing costs. Second, the increase in the size of the company, in addition to reducing costs, to a certain extent, increased the company's ability to bargain with the vehicle manufacturer. Therefore, this risk can be reduced or reduced through industry consolidation.

(3) For export companies, there are exchange risks, anti-dumping and trade protection, and overseas logistics risks. Exchange rate fluctuations are one of the main features of international trade and one of the major risks. The main factors leading to changes in exchange rates are: fiscal state of monetary countries, inflation, international balance of payments, interest rate levels, exchange rate policies, major economic, political or military events. For the aluminum wheel enterprises based in the United States, the pressure for RMB appreciation is huge. Only a slight appreciation of the yuan in 2005 caused individual companies to lose tens of millions of yuan in direct exchange losses.

The trade protection talks of the U.S. automotive industry trade unions and threats such as anti-dumping trade protection measures cannot be ignored. Relative to domestic transportation, cross-border long-distance ocean-going transportation and logistics and distribution are much more difficult and complicated. With high costs and long transportation time, customs clearance procedures are complex and cumbersome, and various irresistible risks are enormous during transportation. In addition, overseas liquidity occupies a large amount of liquidity, low capital turnover, resulting in financial risks and additional financing costs. This is the cost that export companies must bear.

For these export risks, we can actively use export credits, export credit insurance, forward foreign exchange and other financial instruments to reduce or resolve.

In general, these major risks can be effectively reduced or avoided. High risk means high returns. It is not as good as a tiger's hole.

2.3 Analysis of major competitors

For Chinese aluminum wheel manufacturers, the competitors are not only their domestic counterparts, but also the overseas companies that they now or in the future have to face the same market strategy.

In the United States, the main OEM aluminum wheel suppliers are Superior, Alcoa, Hayes-Lemmerz, Hitachi, Prime and non-native suppliers. Among them, Supe-rior is the world's largest manufacturer of aluminum wheels, accounting for 39% of the 40 million US OEM market (Wall StreetJournal, June 10, 2004), GM, Ford, Dai-ke, Toyota (USA) Nissan (USA) and others. In Europe, the main OEM suppliers are ATS, Hayes-Lemmerz, BBS, etc. Among them, Hayes-Lemmerrz is a company with a history of 100 years and its main business is steel wheels. The factory is located in Europe, North America and Asia. In Japan, the main OEM aluminum wheel suppliers include Enkei, Topy and others. Among them, Enkai is relatively large and more comprehensively competitive.

Under the general trend of global procurement, low-cost competitive strategy is a direct and powerful weapon to win. According to the Superior's annual financial report, Superior had a profit of 78.25 million U.S. dollars in 2002, a profit of 73.72 million U.S. dollars in 2003, a profit of only 4.465 million U.S. dollars in 2004, but it had a loss of 5.838 million U.S. dollars in 2005, and a huge loss of 14.07 million U.S. dollars in the first three quarters of 2006 (Data Source: Superior International Industry website). Superior has closed a factory in California and moved to Mexico. In the same way, Hayes-Lemmerz has also experienced a painful process from brilliant to losing money and closing factories in the past two years.

This outcome is a direct result of the global procurement of the aluminum hubs of the three major automotive companies in the United States. It is also the result of a powerful attack by low-cost competitors in China. Needless to say, one can conclude that the best in the Chinese aluminum wheel industry already has the ability to compete with the world's opponents on the same stage. Now, it is time for Chinese aluminum wheel companies to rapidly gather high-quality resources in the industry, reorganize teams, increase production capacity, and prepare for a decisive battle.

3 Strategic Choices and Implementation

3.1 Strategic Choice

(1) Enterprises in the domestic aluminum wheel industry, based on their own characteristics and strengths, carry out accurate market positioning, or supply main OEMs, or main supply retail markets; either domestically or abroad, or both.

(2) Focusing on core enterprises with strong comprehensive competitiveness in the industry, through joint ventures, cooperation, mergers and acquisitions, integration of industry resources, organization of strategic alliances for supply cooperation, implementation of rational division of labor and stratification of supply levels, each in its place, achieving advantages - Complementary weaknesses and rapid formation of enterprise groups.

(3) According to the comparative advantage of Chinese manufacturers, the core enterprises of the enterprise group should choose a cost-competitive competitive strategy, seize market opportunities, and quickly fight for international market space.

3.2 Several issues of strategy implementation

(1) Comparing with Superior, aluminum wheel enterprises in China are still weak in R&D and production management. The core enterprises in the enterprise group must make “remedial classes” in time and quickly increase their overall strength. Currently, both DeKalb and Wanfeng have established important or provincial R&D centers and have invested a lot. It should be noted that the more influential professional wheel companies such as Superior are temporarily lost in the innovation and adaptability of their strategy (Peking University, Li Yue). If they are like BBS, Prime and other low-cost countries that have already shifted their production, the world wheel industry will be another sight.

(2) Relying on the host plant to build the factory nearby and deploy the site, saving logistics costs.

(3) Increase human resources development. In the final analysis, the competition of enterprises is the competition of talents. Currently, industry leaders such as DeKalb have invested in the construction of their own staff training centers and established long-term talent cooperation mechanisms with university research institutions.

(4) Enterprise mergers and reorganizations, not only to integrate production resources, but also to achieve the integration of corporate culture, pay attention to the compatibility of corporate culture.

3.3 Ways that can be used for reference in implementation of integration strategy

(1) The subcontracting system of Japanese companies is an effective model for establishing strategic alliances and enterprise groups. Its mechanism is conducive to promoting long-term stable mutual trust among alliance members, reducing intra-group transaction costs and enhancing group cohesion and competitiveness.

(2) Haier's M&A and cultural integration model, applicable to the Chinese aluminum wheel industry, is a relatively quick model for rapidly transforming merged companies.