| 07-12-2007
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. Shares
of Minth slipped eight Hong Kong cents yesterday to HK$11.68 (US$1.50), though
they are up 83% this year. Their peak close was HK$13.50 on July 5.
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