Auto sector revs up

With limited land area, sky-high car prices and a tiny market, Singapore would not usually be associated with the car industry. Nevertheless, many Singapore-based companies are already plugged into this segment, and the range of business opportunities is set to grow, states International Enterprise (IE) Singapore, the government agency in charge of promoting overseas businesses. 

Singapore is not in the game to compete against giants like Detroit, Stuttgart or Toyota City. Rather, they have found a role to play by being global components suppliers with niche technologies. Last year, the Singapore players sold nearly $600 million worth of automotive parts to the industry, and IE Singapore's target is for these companies to achieve output worth $1 billion by 2008. Several government agencies are involved in this push to grow the sector. Together with IE Singapore, the Agency for Science, Technology and Research (A*STAR), the Economic Development Board (EDB) and SPRING Singapore launched the Auto IGNITE initiative last October to develop Singapore’s automotive industry into one of international standing. Fung Mok Wing, deputy director, precision engineering and general industries division, of SPRING Singapore, says: “One of SPRING’s strategic thrusts is to enhance enterprise capabilities. For the automotive industry, for instance, SPRING provides support to our SMEs in areas such as product design and process development.” Research firm Frost and Sullivan estimated that the Asia-Oceania region, is the largest area for producing automotive parts, contributing up to 38% of production in 2004, ahead of major car-industry regions like Europe and North America. Consultancy firm McKinsey has projected that Asia’s automotive-parts industry will rise fourfold to US$375 billion ($1 approx US$0.63) by 2015, from US$65 billion in 2002. “The growing automotive market offers opportunities for Singapore’s automotive suppliers, who are not only strategically located in Singapore but have extensive manufacturing networks in the region,” says Khaw.

Khaw: The growing automotive market offers opportunities for Singapore's automotive suppliers, who are not only strategically located here but have extensive manufacturing networks in the region

Khaw was speaking at the inaugural Auto IGNITE Forum 2006, Singapore's first major procurement event-cum-conference for the automotive supporting industry. More than 50 local automotive components suppliers took part, and the buyers were represented by 11 companies, including BMW, DaimlerChrysler, Delphi Automotive Systems and Robert Bosch. These buyers source from Asia a total of US$1.8 billion worth of components every year.

Certainly, the auto market in this region is critical for any global car maker worth its salt, by virtue of its size. “East Asia is really a collection of different markets — customer needs, government policies and markets are different,” says Kohei Yamada, senior general manager, external affairs department, Toyota Motor Asia-Pacific, the world-class car maker that is poised to become the world’s largest. “The market in East Asia is expected to be as large as the European Union and North America by 2010.”

Favourable trends

Several important trends are working in the favour of Singapore companies. Costs and competitive pressures are forcing car makers to fi nd more and more cost-effective solutions for their products. Asia is a natural choice for such a move. “This means more opportunities for Singapore suppliers,” says Khaw.

Also, just like with many electrical products, after a period of cooperation and having gained a certain level of expertise, the client companies would pass on more responsibilities and functions to the suppliers. “The customers are even looking at engaging the suppliers at the conceptual stage,” says Khaw.

Singapore-based companies are also fortunate that several key trends evolving in the car making industry are demanding expertise that is right up their alley. One is the increasingly common use of electronics components in cars.

“As technologies advance and customer needs become more sophisticated, the electronics functionality of the vehicle is going to be a key differentiator for both the automaker and buyer. Automotive electronics will become a driver that creates buzz for Singapore’s local automotive supporting industry,” says Khaw. 

Technology Forecasters Inc says costs of electronics components used in cars will rise from around 10% in the 1990s to 40% by 2010. For example, in the current generation of the Mercedes S-class, each car contains at least 70 networked electronic control units, compared with 10 years ago, when most cars would have only three networks.

“Our component suppliers are well equipped with relevant niche technologies and expertise to provide electronics content such as navigation systems, auto sensors and emission control. Our companies can tap this emerging sector, leveraging on both in-house and institutional resources in product development and technology adoption,” says Khaw.

Targeted strategy

So, how can Singapore companies seize the opportunities available? IE Singapore suggests they build up niche technologies, leveraging on their years and wealth of experience in fields like audio and telematics. Outright acquisition is another option. For example, a Singapore company recently acquired an established automotive design house in Shanghai, says Khaw.Also, the companies should move up the value chain to become system-level manufacturers for client companies, be they original equipment manufacturers (OEMs) or original design manufacturers. “For example, Bosch, a well-known Tier-1 supplier, outsourced its mechanical design and development of a car audio system to a Singapore supplier,” says Khaw. “This augurs well for our continued success in working with global Tier-1 companies and OEMs.”Finally, form strategic alliances with other companies. First Engineering, for instance,forged a deal with a German engineering firm. “It was a win-win situation as the German company wanted to set up a manufacturing presence in China, and could tap First Engineering’s operations in Suzhou,” notes Khaw. “On the other hand, there was technology transfer from the German firm to First Engineering in the form of a waterbased painting system. This system is in high demand because of its cleanliness and ability to meet Europe’s stringent environmental requirements. It allowed First Engineering to gain access to other customers.” The opportunities are clearly there, and some Singapore companies have already grabbed it. Gentlemen, start your engines.

A*STAR ignites

Dr Lim Khiang Wee, deputy executive director, Science and Engineering Research Council, A*STAR, and an active  proponent of the automotive industry, shares his thoughts, methods and objectives.

When did A*STAR identify the auto industry as a growing one, thus deciding to focus on it in a big way?   The rapid growth of the automotive market in Asia-Pacific, driven by Tier-1 automotive companies, has fuelled the need for strong supporting players. This presents partnership opportunities for local automotive supplier industries, which will need to diversify and move up the value chain to gain a share of the pie. The research institutes under the Science and Engineering Research Council of A*STAR, which are close partners to industry, have implemented initiatives to support the automotive sector since 2003. A*STAR is a member of the Automotive Supporting Industry Committee, an inter-agency collaboration effort launched in 2004 to grow Singapore's supporting automotive industries. The A*STAR Capabilities for Automotive Research taskforce was formed in June last year to continue to address technical challenges in the automotive arena and provide technical leadership for the automotive supplier industry in Singapore through R&D. How can A*STAR ensure the commercial relevance of research projects in the pipeline? Our links with the international research community provide useful input in the identification of research areas that are of commercial relevance. A*STAR actively communicates with and obtains feedback from the automotive industry, particularly the OEMs and Tier-1 companies, through roundtable discussions, seminars, workshops, dialogue sessions and industry consortia. Some research projects are undertaken in active collaborations with companies, which define the research outcomes with their business goals in mind. This is augmented by research staff at the research institutes who have relevant industry experience.

What is A*STAR's target for this sector in the medium to long term?

In the medium term, A*STAR will work with companies, leveraging on existing platform technological capabilities in automotive research in infocomm, data storage, computation, modelling, materials and manufacturing to develop components and modules to support the automotive market. We will also work with IE Singapore, EDB and SPRING to form

consortia and develop business partnerships with Tier-1 companies and the local small and mediumsize enterprises to boost the local supplier industry. In the longer term, A*STAR hopes to engage OEMs and Tier-1 companies to co-develop automotive technologies for future applications that will also involve participation from the local automotive suppliers.

Intec banks on cars and the good life

Ricky Souw has a simple reason for focusing on the automotive industry in Asia: Most people aspire to own cars. With Asia’s economy growing rapidly and personal wealth increasing, it is almost certain that demand for cars will grow too. “One of the elements of having a good life is owning a car,” says Souw, managing director of Intec Manufacturing Asia (Intec), a supplier of specialised automotive components to the car industry. Souw is also CEO of Sanwa Plastic Industry, a home-grown plastic-parts maker. When Sanwa was started in the late 1970s, its main customers were Japanese consumer electronics players like Aiwa, Asachi Electronics and  Matsushita, he says. Realising that it was becoming an increasingly competitive market, Souw knew he had to do something. “We slowly abandoned the [consumer electronics] market,” he says. Intec is a joint venture between Sanwa and US-based Intec Group. “Intec had the good vision to come out pretty early. They know the future for expansion is in Asia,” he says.

Souw says Intec is focusing on five key areas representing the critical components of a car, as opposed to non-essential parts like those for hi-fi systems

In the mid-1990s, Intec Group was looking for an Asian partner to grow its business. It met with companies from Malaysia, Thailand and Singapore. Sanwa was the last to be approached by Intec Group, says Souw. “I suppose you can call this fate, but we clicked and agreed on the partnership within two days,” he says. The joint venture became operational in 1997 and there has been no looking back since.

The automotive supply industry is highly fragmented — not just in the number of players but also in the sheer number of parts involved. For example, a regular mid-range vehicle needs more than 13,000 individual parts.

Knowing that the field is competitive, Souw is careful to choose his battles. “We need to define very clearly which areas to focus on,” he says. After careful consideration, the company decided to focus on five key areas: sensor module housing, body electric module, fuel pump, ignition control, and motors.

To Souw, these are the critical components of a car, as opposed to non-essential parts like those for hi-fi systems, entertainment consoles and so on. “We believe we can meet the quality demand. We will have less competition, but we shoulder more responsibilities. Yet, we earn higher margins,” he says.

The automotive industry is expected to be the company’s biggest revenue contributor, even though other sectors, like electronics and even biotechnology, will be developed.

Intec has set a five-year target of $60 million in revenue, from the current $25 million. Half of that is expected to come from the automotive sector. From Souw’s perspective, however, the industry has good prospects. He describes this $60 million figure as “modest”, as the company has significant deals in the pipeline that are still under wraps. If these deals materialise, the company’s top line would be given a much bigger boost.

Souw is also upbeat about the company’s prospects beyond its five-year goal. People’s desire to own cars is unlikely to change anytime soon. “The growth will remain pretty strong for the next two decades,” he says.

Innovalues focuses on automotive sector Within just a decade of its establishment, Innovalues Precision, a precision parts supplier, has achieved a string of accolades from the industry. The company, founded by Goh Leng Tse as a four-man set-up, is today a Mainboardlisted regional firm with a market capitalization of more than $100 million. Innovalues has identified the automotive industry to drive itself to greater heights. “Judging from the industry trend, over the last three years, automotive suppliers from the US and Europe are doing more outsourcing from Asia,” says Steven Pung, the company’s business director. “Since we are in the precision-engineering business, we see opportunities. We can value-add to the industry, and our focus is on ‘critical-to-function, critical-to-safety’ components.”

Pung (right), with Soh: Our focus is on 'Critical-to-function, critical-to-safety' components

Innovalues got its first big break from the automotive industry in 2003, when the company was introduced to Texas Instruments (TI), to supply parts that go into sensors used in brakes and airbags. These parts are then supplied to marquee names like Mercedes and BMW — a testament to their quality.

It is not easy being an automotive-parts supplier. The qualification process takes about a year and can cost the customer up to $1 million to do the necessary tests and processes, says Pung.

Besides TI, the company has won a few more German customers, like Bosch and Siemens VDO. Pung says introductions by International Enterprise Singapore’s officers stationed overseas have been very helpful in opening doors. “Some of them can’t even differentiate between China and Singapore, but IE’s introduction and pre-marketing has made all the difference,” he adds.

In the financial year ended December 2005, the automotive segment contributed 10% of total revenue, up from a mere 3% in 2004. This year, analysts are expecting this proportion to hit 18%, and the company’s target is for automotive parts to generate half of its turnover by 2008. “We want the automotive business to be the core,” says Pung.

The company’s optimism is not without basis. US and European companies are relatively new in outsourcing to Asian manufacturers, which have helped them to enjoy costs savings of about 20%. Furthermore, Asia as a car market is probably the world’s fastestgrowing. “They want to be near where the action is,” says Soh Wai Kong, Innovalue’s chief financial officer.

To cater for this projected growth in the business, the company is adding capacity to its plants in Thailand, Malaysia and China. The total factory floor space is about 30,000 sq m, and will be increased to 47,000 sq m by the end of 2008, says Soh.

Rayco expands through tie-ups

The company has recently sealed several key strategic partnerships in the automotive sector, which will thus increase its growth in this segment. For example, it has entered into a joint venture with a Dutch company to produce high-performance elastomer impellers for fuel pumps. Also, Rayco has formed a strategic alliance with a German Tier-1 supplier of precision elastomeric components, says Ng, who is in her 38th year with the company.

From the company’s perspective, things are looking good. “The automotive market is stable and consistent, and the growth is healthy,” says Ng. “We are focused on automotive electronics, like sensors and controls, which will be our competitive advantage. We are also getting involved sooner, in the design and development stages. That’s our competitive advantage.”

Stories are taken from Beyond Singapore (October issue). Beyond Singapore is brought to you by IE Singapore and The Edge Singapore. 
 

Source: Beyound Singapore Oct 2006 issue