http://www.iht.com/articles/2007/06/06/business/parts.php

JINZHOU, China: Zhao Qingjie's favorite book, he says, is a Chinese translation of the autobiography of Lee Iacocca, the celebrated American carmaking executive.

Zhao, who runs one of China's largest manufacturers of automotive starters and alternators, has long been interested in the United States. That should make his counterparts in the auto parts industry elsewhere very nervous.

"Entering the U.S. market is one of our key strategies," said Zhao, whose company, Wonder Auto Technology, has obtained a Wall Street stock listing and is preparing to start exporting.

China's auto parts exports have increased more than sixfold in the past five years, nearly topping $1 billion in April and emerging as one of the fastest-growing categories of Chinese industrial products sold overseas. More than half of these auto parts go to the United States; most of the rest go to Europe and Japan.

The rise of Chinese auto parts exports is part of a much broader shift. China is moving up from producing basic goods like textiles, toys and shoes and toward making higher-value industrial goods. The production of the higher-value goods pays better wages, but these goods also compete more directly with products from countries like Mexico and even from advanced industrialized countries like the United States.

While China has room for considerable further growth in auto parts exports to the United States, it is not competitive overseas in bulky products - like car seats - that are uneconomical to ship, nor can it export parts that need to be manufactured close to a car factory for quality-control reasons.

China's rising labor costs and strengthening currency are also making automakers leery of becoming too dependent on China for parts that can be shipped.

The latest wave of Chinese auto parts exports is nonetheless on the rise, led by domestic Chinese auto parts manufacturers like Wonder Auto that are rapidly gaining strength and starting to enter markets around the globe.

Domestic manufacturers like Wonder and Wanxiang Group are relying on the same inexpensive Chinese assembly line labor as the multinationals like Delphi Automotive Systems and Visteon. But they can undercut the globe-girdling giants in part by hiring talented but cheaper Chinese engineers and headquarters staff.

Soaring output at auto assembly plants in China is generating enormous demand for auto parts and creating the economies of large-scale production previously possible only in North America, Europe and Japan.

With at least a half dozen Chinese automakers planning to start exporting in the next few years, Chinese auto parts will soon be going overseas not just in crates but as part of fully assembled cars.

Multinational automakers set virtually the same quality standards for their operations all over the world. They are working closely with Chinese parts companies to help them meet these standards; once they do, they are allowed to submit bids for supplying factories elsewhere.

"They get put on the global list, and then can quote for anything worldwide," said Nick Reilly, the president of GM's Asian and Pacific operations.

Chinese auto parts have surged in the American market as imports have declined from the Japan, Canada and Malaysia and have stagnated from Mexico and the European Union.

China is strongest in electrical and electronic components and in cast metal parts that require environmentally hazardous casting and a lot of manual labor for machining.

Feeling the pinch are small auto parts manufacturers and their employees in the United States, heavily concentrated in Ohio and mainly supplying larger auto parts companies instead of shipping directly to the big automakers.

While overall U.S. industrial production is on the upswing, the troubles of the auto parts industry could become an issue in next year's presidential elections.

China is rapidly grabbing orders for replacement parts sold to repair garages. Wanxiang Group is already building up its distribution in the United States by purchasing Neapco, a steering shaft company in Pottstown, Pennsylvania, and striking a deal with Ford in April to buy its prop shaft business.

Zhao, of Wonder Auto, calculates that it costs him $4 million to set up an assembly line in Jinzhou with mostly manual labor, employing 20 workers.

The combined wages of 20 workers here come to only $40,000 a year at the current exchange rate of 7.65 yuan to the dollar. That is in the range of annual base pay wages for one unionized auto parts worker in the United States and comparable to two nonunion American auto parts workers.

Total benefits for 20 workers add up to another $20,000 a year, Zhao said.

The company's wages of $170 a month remain respectable by the standards of this gritty refinery city of 800,000 in northeastern China. A small apartment without modern amenities like a refrigerator or air conditioning rents for as little as $40 a month, while even a large meal at the restaurant of the city's best hotel costs less than $3.

Jobs at Wonder Auto are highly prized and turnover is almost zero, said Sun Shao-hua, 30, who strips copper wires for alternators, the devices that take mechanical energy from the engine and turn it into electricity to recharge the battery.

"Many people come, but nobody ever leaves," he said.

Zhao said he was already in discussions with General Motors and Volkswagen about supplying their operations, first in China and then overseas. For now, Zhao mainly supplies domestic Chinese carmakers, notably Brilliance China Automotive.

While China's auto parts industry is growing rapidly, automakers are nervous about buying all of their parts from China. They cite three important factors that are becoming increasingly unpredictable for any manufacturer doing business in China: labor and raw material costs, and the exchange rate of the yuan against the dollar.

Industrial wages are still low in China compared with wages in other car-manufacturing countries. But Chinese wages have been soaring by 10 percent to 30 percent a year for the last several years, auto executives said.

Skilled workers at car factories in high-income coastal areas can earn nearly twice as much as workers here in northeastern China, a Rust Belt of aging industrial complexes built with Soviet help in the 1950s.

The biggest question mark hanging over China's future exports lies in the currency exchange rate - a problem Japanese auto executives in particular know well after dealing with the yen-dollar exchange rate.

China has allowed the yuan to appreciate by 6 percent against the dollar in the nearly two years since breaking its fixed peg to the dollar. Chinese officials have repeatedly warned of their reluctance to accept faster appreciation.

But Chinese foreign-exchange reserves have ballooned to $1.2 trillion from $316 billion in the past four years as Beijing has bought dollars on an enormous scale to prop up demand for the American currency and prevent it from falling faster against the yuan.

For all the uncertainty, Wonder Auto and other Chinese parts makers are growing quickly. Wonder's sales rose 45.8 percent in the first quarter, to $21.6 million; profits nearly doubled, to $2.7 million.

Traded on the over-the-counter market in the United States, the company's shares have risen more than fivefold since an initial public offering last June; Wonder Auto has applied for a Nasdaq listing. The rapid rise has enriched Zhao, who owns 54.2 percent of the company's shares, worth more than $90 million, as well as 11 percent of another company in Jinzhou that manufactures air bag sensors.

That is quite a change from his earlier life. Forced to spend three years on a farm after high school during the Cultural Revolution, Zhao taught himself to fix tractors. Denied admission to a naval academy because his father was a Nationalist soldier before the Communists won China's civil war, Zhao went to a technical institute instead.

(Courtesy of International Herald Tribune)