Going local: Japanese carmakers turn to Chinese parts for China market

Thu Apr 18, 2013 5:23pm EDT
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By Kazunori Takada

SHANGHAI (Reuters) - When Nissan Motor Co Ltd (7201.T: Quote) was preparing to launch the Venucia marque with its China venture partner two years ago, it sourced more components locally to keep costs down - and was sent mislabeled parts and sun visors that melted in the heat.

The quality of Chinese-made car parts has since improved and, facing tougher competition in what is now the world's biggest autos market, Nissan and its Japanese rivals Toyota Motor Corp (7203.T: Quote) and Honda Motor Co Ltd (7267.T: Quote) are having to increase the locally made content in their cars.

This is a big step for Japanese automakers that have built a global reputation for quality through close relationships with known and trusted suppliers, many of whom they own and control and with whom they jointly design and develop components.

But, at the fast-growth end of the Chinese market - the sub-$10,000, no-frills cars that appeal to a new generation of drivers - the Japanese are going bumper-to-bumper with local manufacturers such as Geely (0175.HK: Quote) as well as some global brands, and they need to contain their costs. This segment of the market is seen as a key battleground for all carmakers as growth is forecast at nearly 40 percent over the next two years.

Entering China a decade ago, Japan's automakers relied heavily on parts from their affiliates, or "keiretsu" companies, which were often imported from Japan or elsewhere. To check costs, the automakers urged suppliers to shift production to China - and Honda and Nissan say they can now secure more than 90 percent of their car parts locally depending on brand. But even these parts made by "keiretsu" suppliers at Chinese plants are more expensive than those from Chinese manufacturers as they often rely on materials imported from Japan.

Now, a firmer yen and a lingering anti-Japan sentiment from a territorial row between Asia's two leading economies last year are adding pressure for automakers to source more parts from local Chinese suppliers.

Until now, the battle for the sub-$10,000 car market has been between Chinese firms. But as the higher-end market is crowded and volume sales are at the cheaper end, the entry-level segment is one that foreign automakers can no longer ignore.

TAKING ON KING KONG   Continued...

An employee works on the interior of a car along a Geely Automobile Corporation assembly line in Cixi, Zhejiang province in this June 21, 2012 file photo. REUTERS/Carlos Barria/Files