Resilient Chinese Auto Firms Overcome Supply Chain Challenges
Amidst the automotive industry’s transformation, a German auto automation giant faces bankruptcy, while China’s resilient and adaptable firms thrive in the face of challenges, showcasing strategic advantages and redundant capacity.
Recently, a German automotive automation manufacturer announced its sudden bankruptcy, causing a stir in the industry. The company had been a major player in the production of automated assembly lines for fuel-powered car transmission and steering systems, establishing itself as one of the world’s largest suppliers in these sectors with a significant market share in Europe and the Americas. However, with the advent of the electric vehicle transformation, the company also ventured into the new energy field and, by 2022, had achieved nearly one-third of its revenue from sales of battery and motor production lines. The company had accumulated a substantial number of new orders, with over 50% related to the new energy business, seemingly well-prepared for the crucial transition to electric vehicles.
However, our investigation revealed that the company’s bankruptcy was not a sudden event. As early as 2018-2019, automotive manufacturers began demanding stringent payment conditions, shifting from the traditional four-stage payment ratio of 3/3/3/1 to 3/0/6/1, and even adopting extreme conditions like 0/0/9/1. These changes put enormous pressure on the company’s working capital.
Subsequently, the COVID-19 pandemic in 2020 further exacerbated the company’s predicament. While clients agreed to postpone payments and penalties, the altered payment conditions led to cash flow difficulties, especially during a global shortage of chips and controllers. The increased procurement costs made it challenging for the company to deliver orders on time, casting doubt on its credibility among clients.
Furthermore, due to fierce competition from Chinese suppliers offering competitive bids for new energy orders, the company had to swiftly take on a large number of new energy projects. However, lacking experience and expertise in this domain, the company had to outsource engineering teams to meet client demands, further increasing costs and difficulties.
In 2021, the global supply chain faced significant disruptions, particularly in the chip and controller sectors, which dealt a fatal blow to the company. The delay in delivering projects resulted in a backlog of inventory, and an inability to assemble, program, and debug the equipment, despite having a plethora of idle outsourced engineering teams, increased expenses significantly. This situation pushed the company into deeper trouble.
Adding to these issues, the effects of global inflation and interest rate hikes made the financial markets less favorable to the automotive industry. Banks and creditors gradually withdrew credit or ceased to provide new credit lines, with the new credit lines carrying interest rates almost ten times higher than before, further worsening the company’s financing environment.
After attempting to salvage the situation, the company was ultimately forced to declare bankruptcy. For this once-promising German medium-sized enterprise, improper market environment and strategic adjustments eventually led to failure. This event has triggered industry-wide reflections on risk management in business operations.
So, how are Chinese companies coping with similar challenges? I also interviewed some Chinese company chairpersons and executives that benchmark against German companies. All of them are facing difficulties and hardships, with many claiming they are working tirelessly. However, over the years, they have accumulated some strategies to deal with these challenges. Some of these approaches, if applied earlier by the German company, might have yielded different outcomes.
Chinese companies embraced payment models like 3/0/6/1 or 0/0/9/1 at an early stage. They generally resort to two solutions when faced with such challenges: initial public offerings (IPOs) and fund-raising. Non-standard automation, particularly in the automotive and new energy sectors, is a field with considerable technological content and barriers, making it popular in the market and eligible for policy support. Therefore, IPOs and refinancing offer a way to alleviate cash flow pressure to some extent.
Moreover, Chinese companies employ a tactic of deploying a large number of engineers to accelerate project timelines. For instance, a German company received an invitation from Tesla to participate in the construction of some production lines at Tesla’s Berlin factory. Tesla demanded that the entire project be completed within 12 months, from contract signing to on-site commissioning. Internally, the German company believed it would take at least 18 months or even longer. Conversely, a Chinese company I interviewed successfully delivered a production line to Tesla’s Shanghai factory in just 12 months, meeting the client’s 12-month deadline for payment upon project completion and acceptance. The faster delivery and efficiency directly influence the company’s cash flow efficiency. If a client requests a 12-month delivery, but the supplier delivers in 6 months, the cash flow efficiency of the company can be doubled. This is why it is not uncommon in China to witness a party shorten the project period of the counterparty. However, the German company had not yet fully grasped the essence of this strategy.
Furthermore, Chinese companies have long been accustomed to high-growth environments and, therefore, maintain a reserve of “redundant” capacity. In the automation industry, this translates to having a surplus of engineers. When faced with significant transformational changes, such as the new energy transition, the surplus “redundant” capacity can be swiftly deployed, allowing companies to avoid being constrained by capacity bottlenecks and the need for costly temporary hires of third-party capacity (outsourced engineering teams). Another characteristic of redundant capacity is PLCs (programmable logic controllers). I was surprised to learn that many Chinese companies stockpile various PLCs. Therefore, despite the supply chain crisis in 2021, they managed to complete deliveries with ease. The reason behind this practice is probably due to a lack of experience in engineering design, leading to the habit of stockpiling reserve materials.
In conclusion, the bankruptcy of this German enterprise, which once appeared to be a typical and high-quality medium-sized German company, highlights the significance of market conditions and appropriate strategic adjustments. This event has sparked thorough considerations of risk management in business operations across the industry. While Chinese companies also face challenges and hardships, they have implemented certain strategies over the years that, if applied earlier by the German company, might have led to different outcomes.