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How Magna International quietly became a powerhouse in China

As North America’s auto sector sputters, China is hitting the gas

Qoros 3 on display at the Shanghai Auto Show

The Qoros 3 offers a glimpse of what’s coming next for the Chinese auto market—and for Magna

The Qoros 3 isn’t a fancy car, but it does suggest what’s coming next for China’s automotive market. Some aspects are typical of the small sedans already clogging Shanghai’s streets: its 1.6-litre, 125-horsepower engine drags its wheels a bit, and its interior is somewhat spartan. But that impression is interrupted by the sophisticated eight-inch touchscreen mounted smack in the middle of the dashboard. And with its oddly louvred grille and demurely squinting headlamps, it’s actually a bit of a looker. Most striking, it scored high points last year in a European crash test—setting it apart from other Chinese-built econoboxes, traditionally regarded as coffins on radials.

Although Qoros is testing European interest by selling small volumes in Slovakia, the 3 isn’t coming to a dealership near you. It does, however, reveal something about where Canada’s automotive sector is heading. Subsidiaries of Magna International, the Aurora, Ont.–based global auto supplier, helped build it; through its Steyr engineering centre in Shanghai, Magna participated in developing the vehicle’s architecture and helped Qoros select its suppliers. Along with more familiar models like the Mini Cooper, Ford Fusion and Jeep Grand Cherokee, the 3 was one of the Top 10 vehicle programs for which Magna earned tooling, engineering and other sales during 2012 and 2013. Built in Changsu (80 kilometres northwest of Shanghai), the first sedans went on sale in China in November. Qoros unveiled a new hatchback version at the Beijing Auto Show in April.

Whereas Qoros’s management made a splash at auto shows from Shanghai to Geneva, Magna quietly established a significant presence in China over the past decade. It hasn’t always known precisely what it wanted to achieve there, or quite how to achieve it. But the picture became clearer as China evolved from an automotive backwater into the world’s largest market for passenger vehicles. (Last year domestic sales of motor vehicles reached nearly 22 million units, compared to 15.5 million in the U.S.) With limited growth prospects for its traditional strongholds in North America and western Europe, Magna’s Asian presence has become the road to its future.

Infographic showing Magna International’s profit and marginMagna first arrived in China as the result of acquiring a seating company in 1996 and a mirror supplier in 2002; both came with Chinese operations. Magna’s closures division also opened a Chinese plant in 1999. The passenger vehicle sector was embryonic at the time; recognizing the crucial role of foreign suppliers, the Chinese government attempted to woo them with a rare concession, offering majority ownership of local companies. But it was not until China joined the World Trade Organization in 2001 that suppliers truly took notice. In 2003, then-CEO Belinda Stronach vowed to spend much of her time devising a strategy “to enter the burgeoning automotive market in China.”

Her father, company founder Frank Stronach, built his leading manufacturing company over more than four decades. He watched China’s growing manufacturing prowess with unease. Many competitors and customers (often the same thing, from an auto supplier’s perspective) were already locating plants in low-cost countries. He fretted that low wages and social and environmental standards in China, Korea and India would leave North American manufacturers at a marked disadvantage. As for the growing purchasing power of China’s rapidly expanding middle class, that had yet to capture his imagination.

It was, to be fair, hard to take China’s indigenous manufacturers seriously. Hundreds sprouted up but, as with any country just getting started in automaking, early design work, quality and marketing were all wanting. Some of these companies took the international penchant for alphanumeric model names to an extreme: Dongfeng’s EQ7240BP, putatively a coupe, was seemingly christened by a frisky house cat pouncing on a keyboard. Geely’s diminutive King Kong hatchback in no way resembled its namesake, and its “PU Rural Nanny” (a sort of Chinese El Camino) was lost in translation. But it was not these eccentric new automakers that caught suppliers’ attention. Rather, they simply followed their traditional customer base. Volkswagen, one of Magna’s top customers, arrived in China as early as 1985; the others, including GM, Ford, Daimler, BMW and Fiat/Chrysler, all gradually trickled in. Bending to Chinese requirements, they formed 50-50 joint ventures with domestic companies; Volkswagen formed separate ones with Shanghai Automotive and FAW Group. Dongfeng struck arrangements with Nissan, Honda, Kia and Peugeot.

The pull of these joint ventures was irresistible: within a few years, following China’s WTO accession in 2001, Magna and many of its peers, including BorgWarner and TRW Automotive, began opening plants in China to serve them. Jack Perkowski, a former Wall Street investment banker who established a successful auto-parts supplier called ASIMCO in China during the early 1990s and managed it until 2009, says the progression was both natural and inevitable. The international automakers generally built models that had succeeded elsewhere. “When GM or Volkswagen brings a model to China, to design a new brake system from scratch is a daunting task,” Perkowski explains. “So they tend to bring their suppliers from the home country—the company that designed that system originally for the U.S. or European market.”

The financial crisis reinforced the need for suppliers to perform in Asia. Most of Magna’s largest customers took a drubbing, and two (GM and Chrysler) required government rescue; Magna laid off more than 10,000 workers in response. But Chinese demand continued surging. “The global center of gravity of automotive strength has shifted east,” noted a report that year by Booz & Co., a consultancy.

Magna repositioned accordingly. Today, more than 11,000 of its 125,000 employees are in Asia. Most of them work at its 28 manufacturing operations and nine product development, engineering and sales centres in China, located predominantly along the country’s eastern seaboard. These represent the breadth of Magna’s capabilities: they churn out seats, instrument panels, bumpers, mirrors, latches, oil pumps, fuel tanks and much else besides. Last year Magna opened a powertrain plant in Tianjin, an electronics production line in Zhangjiagang, and an engineering facility in Shenyang. And in February it announced a new joint venture with Chonquing Guangneng Rongneng Trim Co., which will assemble front-end modules at a new facility in Hangzhou. Symbolic of its growing importance, this year Magna broke out financial reporting for its Asian division from its “rest of world” segment, which now largely consists of its struggling South American division. Magna Asia is run by chief marketing officer Jim Tobin, who spends much of his time in China, Japan and Korea, with occasional visits to India.

All this has gone largely unnoticed by those preoccupied with Magna’s short-term performance. Questions about North American and European operations still dominate Magna’s conference calls with equity analysts, for instance. This is unsurprising; despite the rapid growth, Asian sales accounted for just 4% of Magna’s total last year. The rebound of the North American auto industry, and the speed with which Magna has addressed troubles at its European operations, are of greater immediate concern. Even Magna’s struggling South American operations receive more attention.

The further one looks out, however, the more important Asia becomes to Magna. “The North American auto recovery is nearing the end of the road in terms of its double-digit growth,” claimed global consultancy PwC in a recent report. European suppliers are still reeling from economic stagnation, unfavourable demographics and overcapacity. Magna itself has soured on South America, complaining of inflationary pressures and difficulties squeezing acceptable margins from customers there. PwC expects strong demand for passenger vehicles in Russia, India and Brazil in the years ahead, but guesses those markets combined will remain half the size of China’s. Daimler’s top man in China was hardly going out on a limb earlier this year when he told reporters that “for anybody working in the automobile industry, if there’s one place to be, it’s China.”

Many auto manufacturers and suppliers bet that continued strong economic growth will help many more Chinese buy their first car or SUV in the coming decade. Just 6% of the population owns a vehicle, according to data from Bloomberg. And whereas first-time car buyers have been found largely in China’s coastal provinces, promising markets are now opening up further inland.

Perkowski, who sold his auto-parts company to Bain Capital in 2010 but continues to serve the sector through a consulting company in Beijing, believes Chinese auto sales could double again by the end of the decade. He notes China’s massive market for “unconventional” vehicles—which include everything from motorcycles to so-called inkfish (smoke-spewing agricultural vehicles). An increasingly affluent society will replace these unconventional vehicles with passenger cars and other, pricier vehicles, he predicts.

At an industry conference in January, CEO Don Walker noted that China “continues to experience massive growth in percentage and absolute terms.” He announced plans to open six more plants there before the end of 2016, by which time he expects Magna’s in-country sales to have doubled again from current levels. Thanks largely to growing production volumes, Magna expects its margins in Asia will increase from last year’s 5% to 9% or more.

For all the early fears of Chinese automakers flooding global markets with low-cost vehicles, the irony is that they’re struggling just to maintain their position at home. According to the China Association of Automobile Manufacturers, their market share in China has fallen for six months straight, and currently stands at about 38%. The expansion of American and European brands has come at their expense. The Chinese export machine, at least as far as autos are concerned, is in neutral.

Yet Qoros, founded as recently as 2007, reveals growing sophistication. It’s a joint venture between an indigenous manufacturer (Chery) and Israel Corp., an Israeli holding company. The 3 might not be the most imaginative name for a small car—Mazda has one, too—but at least it’s not called the X9HAK124. The styling can be chalked up to European design: the company has design and engineering teams in Munich and Graz, Austria, and many of its executives are veterans of the European auto market. Magna is one of more than a dozen international suppliers to Qoros, which has from its inception vowed to bring European quality to the Chinese market.

Perkowski believes China’s auto-supply market has now entered a second phase in its development. “The supply base is now looking to go beyond their traditional customers,” he says. Those indigenous manufacturers not backed by the State are often more price-sensitive and cash-strapped than their international counterparts; getting paid on time can be challenging. But Qoros isn’t Magna’s only indigenous customer; it has $350 worth of content in the H8, a new SUV from Great Wall Motors. It also sells to Brilliance Auto, Geely, First Automobile Works and Chery itself. Which of these will endure what is expected to be a gruesome consolidation among indigenous manufacturers remains to be seen. But should any of them thrive into global players, who can say where they might lead Magna next?