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GM is looking to Asia for parts

"Our performance in China continues to be encouraging."

Richard Wagoner, chief executive officer of GM

General Motors Corp (GM) is planning to purchase more material in Asia and trim capacity in North America as it struggles to contain huge financial losses in its basic automotive business.

The plan includes increasing its purchases from suppliers in India from roughly US$150 million currently to more than US$1 billion by the end of 2008, GM spokesman Tom Wickham said.

"Remember this is a projection," he cautioned, adding that GM may not be able to find sufficient suppliers to meet that demand.

The need to cut supply costs has been heightened by a sharp rise in steel and oil prices and steady losses in the company's North American business unit.

GM buys roughly US$85 billion in automotive components, steel and other material to feed its automotive operations every year.

It hopes to reduce those costs by buying more components from suppliers operating from Eastern Europe, India, China and other parts of Asia where costs are significantly lower than in North America or Western Europe.

Even parts suppliers in Mexico have lost their competitive edge, GM chief financial officer John Devine said during a recent conference call with outside analysts.

"Five years ago, you would have said you wanted to be Mexico. Mexico is still a terrific place to assemble vehicles. But the business has changed. The place you really need to be is Asia," Devine said.

A recent study by the McKinsey Quarterly estimated that carmakers could cut their annual bill for auto parts by 25 percent by sourcing more components to China and India.

"Shifting to auto parts suppliers in China and India won't be easy and won't happen overnight," the report said. "Sourcing car parts isn't as simple as buying shirts or toys. Car models are more complex with a lifespan of five to seven years so manufacturers must develop long-term relationships with suppliers and enter into contracts that are difficult and expensive to unravel."

The largest drawbacks are the cost and distance of shipping, the report said.

Governments in both China and India, though, are willing to help in the transition, and local demand for auto parts is growing in both countries.

The Chinese government has identified auto parts as one of the sectors it plans to expand over the next decade. Its goal is to export 10 percent of the world's automobiles and auto parts by 2015, according to Global Sources, a Hong Kong-based trade publication.

Both Devine and GM chief executive officer Richard Wagoner said Asian markets remain critical to the company's future as it struggles to return its core business in North America to profitability.

Devine said it was quite possible that total vehicle sales in China will surpass sales in Japan this year, making it the second-largest market in the world.

GM's market share in China rose to 11.4 percent in the second quarter of this year, up from 9.8 percent in the same period last year.

"Our performance in China continues to be encouraging, especially considering our modest presence there just a few years ago," Wagoner said. "Going forward, we intend to capitalize on our momentum in China and take full advantage of the opportunities presented by this large and rapidly growing market. With the roll out of additional new vehicles in the second half of the year and the strength of our current lineup, we anticipate double-digit sales growth to continue in the second half of 2005."
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