Profit shrinking is the fundamental reason. In the first quarter of 2005, profits of automotive industry decreased about 10 billion yuan year on year, down by 60%. Influenced by the stagnation of automotive assembly industry and the rising of steel price, it is the first time in the past ten years that the profit has declined. In the first half of 2006, many automotive assembly plants started to lower the price of part to 15% utmost. While the unit cost of compact sedans increases 1 000 yuan due to the gradually rising price of materials. In this situation the part manufacturers are under more pressure, heating up the competition between assembly plants and part manufacturers. However in the domestic market, a big majority of auto part manufacturers are suffering the double pressure of the rising price of materials from the market and the decreasing price of auto part from assembly plants therefore it is quite diffcult to develop independently further. In contrast, such "pressure" has little impact on foreign-funded auto part manufacturers in China. Having patent and unique skill of their own, they are more freely to resist price risks from the market and even to expand their market scales and extend their distribution network. They win a lot in negotiations with Chinese local manufacturers and are more active than ever. Chinese local manufacturers took measures to diminish the pressure through adjusting and optimizing resource allocation, but seem in vain. In the long run, it is an inevitable trend for Chinese local manufacturers to merge an to reorganize.
Secondly, monopolization of foreign capital also threatens local auto part manufacturer. Foreign capital has obtained large market share in passenger-vehicle part market in China. Currently, foreign capital takes over 60% in China’s auto part market. Foreign enterprises have sole markets of some auto parts, such as high-end electronic control, fuel injection system, transducer, brake system, steering system, etc. With an increase of total registrations, it is undoubted that the auto part industry will develop. While the best solution for Chinese local auto part manufacturer is to merge and reoganize.
Thirdly, the features of domestic auto part enterprise also decide their reorganization in the future. Along with the more intense market competition, problems caused by small scale, low concentricity and disorderly competition become more serious. Thereby, the government need support more, help R & D and accelerate the production of independent intellectual property right product; domestic manufacturers must integrate to complement each other and allocating resources rationally under the direction of market. Only in this way can they compete with foreign investors for a better market share.