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5 Ways China Can Benefit From Japan's Auto Supply Chain Crisis

China's auto industry is currently stuck in its awkward teenage years. The home market is enormous, with growth rates that have already attracted massive amounts of foreign investment. Chinese carmakers have begun to showcase their products abroad and, in the case of Geely and its purchase of Volvo, gone shopping for Western brands. But the Japanese supply chain crisis in the aftermath of the devastating earthquake shows that China remains quite a ways from maturity.

Of course, crisis is opportunity. (Even if the Chinese didn't actually teach us that.) The Chinese auto industry can learn from the disruption that's currently affecting global carmaking, from Japan to the Europe to the U.S.:

  1. Upgrade the business model. China's main competitive advantage is cheap labor. When it comes to high-tech components, the country relies on Japan and others. If it sticks with this model, real value will continue to be imported. An investment now in R&D will enable China to build its own high-value supply chain as an Asian alternative to Japan.
  2. Develop logistics expertise. Getting stuff in and out of China is obviously a big business. But the logistics capability isn't entirely homegrown, and the modern supply chain management systems that make it all happen were developed outside the country. The Japanese parts crisis should enable China to raise its game by perfecting more complex logistics processes -- and then export that expertise, much as Japan exported its management and manufacturing philosophies in the 1980s.
  3. Expand the indigenous parts industry. It could take a while for China to compete with Japan's dominance of intricate electronic components, but auto parts are a different story. China's economy can support a certain amount of excess capacity, so the country can function as a global auto-parts safety valve.
  4. Conceive a strategy for transplanting its carmakers. The supply chain crisis has led to probable shutdowns of Japanese auto manufacturing in the U.S. The timing couldn't be worse, as the U.S. market is starting to recover at a brisk pace. Now is the time for the Chinese to begin thinking about moving away from a pure export model and consider locating capacity in export markets. This way, if Japanese supply ever fails again -- or if Detroit undergoes another collapse -- China will be there to take up the slack.
  5. Create a specialized supply chain for electric vehicles. As the world becomes more reliant on electric mobility, an opportunity exists for China to leverage its commitment to electric cars into a parts advantage. Japan supplies many of the components for high-end consumer electronics. China could fill the same role for high-end electric car parts.
None of this will happen overnight. But if China manages this crisis well from a strategic perspective, we may all look back at this moment in a decade or so and decide that this was the moment when a new "China Way" of dominating the world's auto supply chain first emerged as its industry emerged from a gawky adolescence.

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