About 40 percent of China's auto part companies face severe liquidity this year and some may fail in the next 12 months to 18 months without aggressive measures to conserve cash, according to a new study released yesterday.

Severe cash flow hits 40% of auto part firms [CFP]

China's auto suppliers were both unprepared for, and slow to react to, the dramatic slowdown in vehicle sales both domestically and globally last year, said the annual study by business advisory firm AlixPartners. The study was based on interviews with 40 senior executives from foreign and domestic players in China's auto supplier sector.

In a similar survey last year, 55 percent of respondents expected to see more than 30 percent revenue growth between 2008 and 2010 and healthy margins, but around 40 percent now are saying they have problems with liquidity - cash needed to sustain normal business activities.

"With external financing difficult to come by, and 2009 likely to be another year of margin compression and slower growth rates, China's auto suppliers need to radically improve their cash management to generate sufficient liquidity," said Ivo Naumann, managing director of AlixPartners and head of its Shanghai office.

China's suppliers now have working-capital requirements of more than double the level of their global peers due to operational and supply chain inefficiencies, the study found. They are also performing worse than their global counterparts in profitability, with only American suppliers having lower profit margins on average.

The study said that the aftermarket, generally more profitable for suppliers than direct sales to auto makers, could drive future growth. But this requires auto suppliers to shift the business model to one focusing on a very different set of skills, new distribution channels and sales tactics. This, however, might prove a challenge to many firms.

The study also found merger and acquisitions in the auto supply sector slower than many expected, although high on the agenda for executives.

(Shanghai Daily April 17, 2009)