North American market leader in automotive quality inspection, the PSA Group of Companies, has signed an agreement with two local firms to set up a research center in the southern boomtown Shenzhen.

The Canadian firm's major business in China is currently in sourcing auto parts for its North American and Japanese clients, including General Motors, Ford, DaimlerChrysler and Yazaki.

But it hopes that the deal, with Shenzhen Paicheng Aluminium Technological Co and the Shenzhen Longgang Baoyuan Industrial Co, will lay the foundations for a rapid expansion of the PSA's business in China by tapping into the nation's flourishing auto parts market.

PSA Group Chief Operating Officer Gary E. Small said that the company had already "sourced about US$60 to 80 million worth auto parts last year from China since we set up our China office last June in Shenzhen." Small told China Daily that the figure is "expected to increase dramatically because a growing number of transnational auto manufacturers and parts suppliers have eyed the Chinese market for its low labor costs, abundant labor resources and huge market potential."

Although neither of PSA's two Chinese partners have any experience in auto parts research or production, Small said that PSA "cherished their extensive social relations, strong research team, quality management and close academic relations with Shanghai Jiao Tong University, a national leading engineer university.

Shenzhen Paicheng Aluminum Technological Co is a privately-funded high-tech company engaged in the research and production of aluminum alloy materials. It has a total asset of 210 million yuan (US$25.3 million) and annual sales of around 500 million yuan (US$60.4 million).

For his part, Shenzhen Longgang Baoyuan Industrial Co General Manager Li Jun said he was "optimistic" about the prospects for the nation's auto parts market.

Li added that cooperation with PSA would benefit his firm by "giving us an access to the most modern technology and quality standards accepted by auto manufacturers and suppliers in North America."

A site is currently being sought for both the research center and a manufacturing plant, said Li, adding that it would be possible for a fourth company to join the venture at a later date.

Small revealed that PSA also plans to move three other major businesses to China in the near future, its auto technology engineering consultation, quality inspection & refurbishment and auto industry logistics service.

But Jason Han, who has the responsibility for developing the group's business in the China market, said that at the current stage, it would take time to educate the local manufacturers to become qualified manufacturers.

More Chinese people are now finding that buying a car is within their means, with the fierce competition raging in the auto making industry dragging down the prices to more affordable levels, which is also driving forward the auto parts manufacturing industry.

China's auto production capability increased 30 percent year-on-year in the first four months of 2004, a just slightly less than the 35 percent growth for the full year of 2003 when compared with 2002, but still very strong growth, said Zhang Xiaoyu, vice-chairman of China Machinery Industry Federation.

Auto demand is estimated to increase to between 8 and 10 million units by 2010 and 14 to 18 million units by 2020, he added.

Shenzhen is next door to the Hong Kong Special Administrative Region and adjacent to Guangzhou, where three Japanese auto giants have located their manufacturing plants.

The city has drawn up a host of policy incentives to encourage the autos part manufacturing industry's development and attract increased numbers of foreign investors.

"By taking advantage of its booming high-tech industry, Shenzhen could mainly develop electronic auto parts by introducing technologies and establishing research centers," Zhang suggested.

(China Daily June 8, 2004)