The Invasion Has Begun

by Mitchell Clark, B. Comm.

With all the turmoil in the global automobile industry, you might
wonder if any company is doing well in this industry. Clearly, some companies are on the right track and business is solid for them. If the purported news that GM’s “Hummer” brand will be sold to a Chinese company, this represents the beginning of a Chinese automobile invasion in the domestic marketplace.

Why in the world would anyone want to own the Hummer brand in the U.S. and Canadian markets? Sales are way down, gas prices are going up, and the vehicles themselves garner so much distain from a lot of consumers. The only answer I can come up with is that the buyer wants to reverse-engineer the product, but more so to gain the established distribution network. GM and Chinese auto manufacturers are already working together in China and I think we’ll see the same thing happen in our market. Just like the Korean manufacturers, Chinese manufacturers will be adding to the competitive landscape in the very near future.

Getting back to who is doing well in the global industry, a small company operating in China is really distinguishing itself with its successful growth. Wonder Auto Technology, Inc. (NASDAQ/WATG) designs and manufactures automotive electrical parts and suspension components in China. In 2006, the company ranked second in sales of automotive alternators and starters in the Chinese market and it currently sells over 150 models of alternators, 70 models of starters, and various suspension-related parts, supplying a number of auto-makers and engine producers. The reason why this business is flourishing is that its products are focused on small engines and small cars, which are very much in demand in China.

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In its first quarter of 2009, this company’s revenues grew to a record high of 40.0 million dollars, representing a 29% increase from the comparable quarter last year. Net income grew 30% to $5.2 million in the first quarter, with earnings per share growing 27% to $0.19.

A company like Wonder Auto Technology is only going to keep
growing, because it has an established presence producing auto parts for smaller, more fuel-efficient vehicles. Like many Chinese companies, it also has a cost structure advantage that can’t be beaten by North American industry players.

So, just like the retail business at Wal-Mart, we’re going to see a lot more Chinese auto parts coming over the Pacific and, eventually, the Chinese made vehicles themselves. Buying a Hummer seems like the dumbest business decision you can make. But, for Chinese manufacturers that struggle to deal with North American standards for vehicle safety, reverse-engineering the product is a great idea. The best way for a Chinese manufacturer to begin building its business over here is to start with trucks and SUVs. It’s a lot easier to meet domestic safety standards building trucks than it is building sedans.

There is a kind of inevitability about the expansion of Chinese vehicles in the North American marketplace. I wouldn’t be surprised at all if, in five years, you open the hood of your car or truck and it says “Wonder Auto Technology” on some of your components. The invasion has begun.