Chinese auto parts makers are moving into the overseas M&A fast lane, eyeing a distressed global market to close a technology gap with world leaders to meet sizzling demand at home and eventually sell overseas.
Several major deals have already been inked and more are expected in the months ahead as the global industry retrenches, planting the seeds for a future crop of Chinese titans to compete with the likes of Robert Bosch and Denso.
But missteps, typical in many of China's major M&A deals to date, could also leave the sector saddled with headaches that drove foreign parts makers into difficulty in the first place.
China's automotive sector has grown at breakneck speed in the last decade, passing the United States last year to become the world's top auto market.
Yet its parts sector remains fragmented with 20,000 manufacturers lacking the capital needed to invest to meet higher quality and emissions standards and move up the value chain.
Many Chinese firms, eyeing technologies ranging from engines to braking and transmission systems, are now hiring investment banks, management consultants and law firms to study possible deals.
"We have been advising a number of Chinese companies, which are actively looking at overseas acquisitions in the United States and European markets," said Michael Jiang, a KPMG partner and corporate finance co-head of Automotive China.
Jiang forecast the coming wave of purchases could see a deal that breaks the $1 billion mark.
That would be more than double the largest deal to date, the purchase of General Motors' Nexteer steering components unit by a joint venture of Beijing's Tempo Group and the Beijing government for a reported $450 million last month.
Other notable deals include Geely Automobile paying $40 million last year for Australian gearbox maker Drivetrain Systems International, a supplier to Ford Motor Co, Chrysler and Ssangyong Motor.
And China's largest independent auto maker Wanxiang Group, which owns Shenzhen-listed Wanxiang Qianchao, has also been active, buying more than 20 firms in North America, Europe and Australia over the last few years.
Other major independent parts makers that could drive consolidation include Weichai Power, which bought French engine producer Moteurs Baudouin last year, Nasdaq-listed SORL Auto Parts and Zhejiang Wanfeng Auto Wheel Co.
Ailing global players that could be looking to sell part or all of their operations include struggling U.S. firms like Delphi, Lear and Visteon.
Jiang mentioned Visteon as one company that was rumoured to be in talks to sell assets to Chinese buyers, though a Visteon spokesman declined to comment on market speculation.
Most Chinese parts firms currently lack the size to foot it on the global stage.
Seven of China's 10 biggest component makers are foreign companies, and about 70 percent of the country's $160 billion auto supply market is occupied by foreign or joint ventures
Of the three Chinese firms in the top 10, all are units of the country's leading automakers -- SAIC Motor Corp, FAW Group and Dongfeng Motor, KPMG said. Most of those specialise in lower-end parts.
"The market is becoming so significant, so large and the auto supply industry is lagging a little bit behind in terms of building the necessary size and scale," said Ivo Naumann, managing director of business advisory firm AlixPartners.
Global leader Bosch posted revenues of nearly $50 billion in 2009, even as few independent players in China logged sales of more than $1 billion.
Chinese players may need to make significant investments, both organically and through acquisitions, as quality and emission standards rise and they chase higher margin businesses.
As they do so, they will face a number of challenges, most notably costs that are already rising at home and could rise even further with the acquisition of expensive foreign operations.
A wave of strikes in auto parts factories recently in China by workers seeking better pay and working conditions have already begun lifting costs across the board.
Rising raw material costs, which account for 50-60 percent of total cost, versus 4-12 percent for labour, will also pressure margins, analysts said.
The lack of experience in managing multinational companies could also pose a challenge, as evidenced by a string of failures in major overseas M&A by Chinese firms like SAIC, which bought control of Korean carmaker Ssangyong, only to see it go bankrupt.
"It is one thing you execute the deal and another thing to successfully manage the company," said AlixPartners' Naumann.
If they look abroad, Chinese firms may have to act fast as bargains could soon disappear with a global recovery.
"This window that is open for deals now is not going to open forever because in the United States there is certain recovery in the auto industry," Naumann said.