Q: What factors influence a Chinese auto assembler's selection of suppliers?
- low price?
- dependable quality?
- degree integration with supply chain?
- all of the above?
The transparency I refer to here is not transparency of a supplier's operations; it is transparency of an auto group's financial condition -- or more precisely, the lack thereof. Before I explain what this means, a little background is in order.
The typical Western model of assembler-supplier relationship has evolved over time from one of in-house suppliers to many outside suppliers. At some point, GM decided to focus on its core competency, assembling automobiles, and it spun off its Delphi parts maker. Ford did much the same with Visteon. Delphi and Visteon are now publicly traded companies that not only manufacture parts for their former owners, but are also free to do so for any other firm that wishes to engage their services.
The value for Ford and GM is that they now have more options for sourcing parts, and their suppliers now have to compete against each other for business.
What sort of assembler-supplier models do we see in China? So far I have identified two ideal types: the group parts supplier network and the external parts supplier network. In reality, these types are not mutually exclusive, and we see varying mixes of the two among China's domestic auto assemblers. However, by considering these two types we can gain an understanding of the motivations of Chinese auto assemblers.
The first type, the group supplier network, is one in which all or most suppliers, while not a part of the auto assembly enterprise, are part of the same group or "jituan" (集团) as the assembler. The second type is similar to the Western model in which all or most suppliers are external to, and not organizationally linked with, the assembly firm.
It is easy to assume that Chinese automakers, like their Western counterparts are moving toward the second model for the same reasons that GM and Ford did: increased competition among suppliers allows for lower prices. However, among China's major, listed automakers, the first model continues to dominate, and for reasons unrelated to efficiency. Furthermore, while the landscape continues to evolve, there are varying degrees of internal vs external suppliers for listed Chinese firms.
We might then assume that, ceteris paribus, those companies with the higher degree of internal supply have lower profitability since their suppliers endure less competition for business. In theory, however, we should expect to see exactly the opposite.
In China, most of the major automakers, despite being partially listed on the stock markets, are part of much larger group companies or "jituan". These jituan, while holding controlling ownership in the auto assembly firms, also own many other subsidiaries including hospitals, kindergartens, retail stores, real estate, and yes, auto supply firms. While the jituan's listed auto firm is required to publish audited annual financial statements, the jituan, and all of its non-listed subsidiaries, are not bound by such requirements.
This lack of transparency works in the jituan's favor. By requiring its internal parts suppliers to sell parts to the listed auto assembler at or below cost, the jituan is able to pump up the earnings of its listed subsidiary while hiding the losses of its non-listed subsidiaries. And, all things being equal, higher earnings by the listed subsidiary, lead to a higher stock price which increases the value of the jituan's controlling stake.
The auto firm with many external suppliers, on the other hand, buys a larger portion of its parts at a market-determined price, a price that will allow the parts supplier (itself also possibly a listed company) to earn a reasonable profit. Consequently, the assembler that benefits from competition among its suppliers is punished in the market for doing the right thing. Being unable to force its suppliers to absorb losses, the firm with external suppliers should, all things being equal, earn a comparatively lower profit than the firm with many internal suppliers.
This problem has not escaped the notice of China's State Council or its market regulators. In recent years, there has been increasing discussion of the concept of a "complete listing" (整体上市). The idea here is for a gradual move toward a listing of an entire jituan rather than selected subsidiaries.
As with many new concepts in China, rhetoric often outstrips implementation. For reasons that should be obvious, the jituan are in no hurry to increase transparency, and the government is in no hurry to witness the negative effects on China's stock market that would surely obtain if subsidiary losses are brought to light.