High risks for local projects

PUBLISHED : Tuesday, 23 November, 2004, 12:00am
UPDATED : Tuesday, 23 November, 2004, 12:00am

Output from outside production hubs seen as being in greater danger of failure

Automobile projects spearheaded by local governments outside regional production hubs face a higher chance of failure, according to a government think-tank.

The car industry thrived on synergies arising from regional clustering, said Liu Shijin of the State Council's National Development Research Centre. The mainland car industry, still in an early stage of development, is developing production hubs of varying sizes around the country.

'Production hubs are forming in the Greater Bohai Bay area, the Pearl River Delta and Yangtze River Delta, in line with international trends,' he said at the China Auto Forum 2004 in Guangzhou.

'But [world-class] production clusters have yet to form. Projects outside of these hubs, particularly those driven and funded by local governments, face much higher chances of failure.'

Geographical proximity between suppliers and assemblers improves logistics and production efficiencies, as carmakers are moving towards just-in-time inventory delivery and shorter production lead times.

Another problem facing the industry is the languid pace of research and development and an over-reliance on foreign technology, according to China Securities Regulatory Commission listing director Ren Yanghua in a speech delivered on his behalf at the forum.

'Over-reliance on foreign carmakers is bad. We have some domestic brands and product development capabilities in the truck and bus segments, but our research and development in the sedan segment is very weak,' Mr Ren wrote.

He said the lack of domestic product development capability exposed the car industry to market risks, adding it explained why the sector's health was so susceptible to the government credit-tightening measures.

The lack of proprietary technology had also resulted in low profit margins in the car components industry amid keener competition in the assembly sector, he argued.

'Development of our component industry lags the assembly industry because the technology comes from abroad,' he said.

He said China's component industry capital expenditure investment amounted to only 0.3 times that of the assembly industry, compared with 1.2 to 1.5 times globally.

Mainland component makers invest 1 to 1.5 per cent of their turnover in technology and product development, compared with 3 to 5 per cent in developed countries.