In the first half of this year, China's automotive market reached 6.988 million units, securing its position as the largest in the world. Intuitively, the auto parts industry, which serves as the backbone of the automotive sector, should have experienced robust growth driven by this booming market. However, reality has proven otherwise. Despite the overall rise in vehicle sales, suppliers of components for commercial vehicles have struggled, with their development capabilities failing to match global standards. To shed light on this situation, this report takes a closer look at the challenges faced by the auto parts industry from both market and R&D perspectives. The goal is to provide a more balanced view of the current state of the sector and highlight the disparities that exist within it. **Commercial Vehicle Suppliers Face Survival Challenges** While China’s auto market has surged to become the largest globally, the upstream suppliers of automotive parts are not necessarily enjoying better times. In fact, the situation varies significantly across different types of companies, revealing a stark contrast to the positive trends seen in the broader automotive market. **Parts Companies Struggle with Losses** On June 9th, Changchun Yidong Clutch Co., Ltd., a leading listed company in China’s clutch industry, announced its interim results for 2009, revealing a net loss of over 20 million yuan. This marks a sharp decline from the profits recorded in previous years, including 5.64 million yuan in 2008. The company had consistently posted healthy profits in 2006, 2007, and 2008, with net earnings of 8.12 million, 8.35 million, and 11.11 million yuan respectively. Changchun Yidong specializes in hydraulic clutch mechanisms for passenger cars and heavy-duty vehicles. It holds a significant share of the commercial vehicle market, but the recent drop in heavy truck production and sales has led to a revenue decline of over 40%. Additionally, pressure from mainframe manufacturers to reduce prices further impacted profitability. Meanwhile, some suppliers supporting the passenger car segment have experienced unexpected growth. For example, Hundano (Beijing) Automotive Chassis Systems Co., Ltd., which supplies brake systems and chassis components to major automakers like Beijing Hyundai and Shanghai GM, has seen strong performance this year. **Uneven Industry Landscape** Despite overall growth in the Chinese auto industry, the disparity between segments is evident. While passenger cars and mini-vehicles show signs of recovery, commercial vehicles such as buses and trucks remain in a difficult position. A bus company sales manager noted that short-term recovery is unlikely, with expectations of a slow rebound over the next two to three years. Many commercial vehicle companies have passed cost-cutting pressures onto their suppliers, resulting in delayed payments and price reductions. Some suppliers now face payment periods stretching up to four months, which, while better than others, still highlights the financial strain. In Zhejiang Yuhuan, a key hub for auto parts manufacturing, the impact of reduced orders has been severe. Workers’ incomes have dropped, and many migrant workers have returned home. Local businesses have reported a noticeable slowdown, with some investors even pulling out of the industry. **Self-Reliance Becomes Essential** Faced with declining demand and falling prices, many small suppliers are struggling to stay afloat. Most are focusing on survival during this challenging period, with price cuts being one of the primary strategies to retain market share. “Now, OEMs and suppliers are working closely together,” said a leader from Xiamen Golden Brigade. “Even if we have to sacrifice some profit, we must secure orders.” Once orders are secured, both parties work together to manage the workload. Beyond price reductions, companies are also investing in new products, improving operational efficiency, and exploring new markets to enhance competitiveness. Longzhong Holding Group, a manufacturer of commercial vehicle braking systems and engine parts, has taken similar steps. Despite a 20% drop in Q1 and a 12% decline in Q2, the company has found growth through its aftermarket expansion and product diversification. While some larger firms can weather the storm, the industry as a whole is bracing for a long road to recovery. Many smaller suppliers may not survive the ongoing challenges, signaling an inevitable reshuffling of the market.

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