Why Chinese Auto Parts Stocks Could Be Valuable

The invasion has begun and there's nothing we can do about it. If I were an auto parts manufacturer in North American, I'd be concerned.

In early February, I wrote about an auto parts manufacturer in this column that's planning a major global expansion. The company recently announced its first sales order in the North American market.

Based in Jinzhou City, Liaoning, China, Wonder Auto Technology, Inc. (NASDAQ/WATG) operates through a number of subsidiaries that design and manufacture automotive electrical parts and suspension components. In 2006, the company ranked second in sales of automotive alternators and starters in the China market.

Wonder Auto Technology currently sells five different series and over 150 models of alternators, 70 models of starters and various suspension-related parts, supplying a number of auto makers, engine producers and auto parts suppliers in China and abroad. Some of the company's customers include Beijing Hyundai Motor Company, Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd., Harbin Dongan Automotive Engine Manufacturing Co., Ltd., and Tianjin FAW Xiali Automotive Co., Ltd.

Recently, Wonder Auto Technology opened an office in Detroit and hired a former executive from Delphi. The company just reported that one of its subsidiaries, Jinzhou Halla Electrical Equipment Co., Ltd., received a four-year supply agreement for its starter and alternator products from a major North American OEM automotive manufacturer. The company didn't offer the name of the customer.

All of the units will be delivered directly to the customer's facility in North America and the total value of the contracts is expected to be over thirteen and a half million dollars. Now, this is a small order by any measure, but I think it's the beginning of a major offensive by this company to penetrate the domestic auto parts business.

The great advantage that Chinese manufacturers have is their extremely low labor costs. The auto parts business is already extremely competitive in the domestic market and now there's a new entrant that offers enormous economies of scale.

The Chinese are about to invade the domestic auto parts business and, to be blunt, I'd much rather be an investor than a competitor in that industry.