The Automotive Industry Quietly Leaves China

Over the past 20 years, China has become a global leader in the auto parts industry. The industry’s growth has been driven by European and American car manufacturers who have shifted the production of an increasing number of their components to China to save costs and establish connections with the world’s largest car market.

However, international companies are now making concerted efforts to reduce their dependence on China’s fragmented network of component manufacturers, reported the Financial Times.

– There is extensive rethinking of logistics operations (across the industry). The supply chain will be the focus of this decade – said Ted Cannis, CEO of Ford Pro.

Strict lockdowns and political fears

This move was prompted by two events. The first is the uncertainty caused by China’s zero-COVID policy, which forced factories to close on very short notice.

– The longer the pandemic lasts, the greater the uncertainty – said Volvo CEO Jim Rowan earlier this year when he announced that Volvo (which is backed by Geely) is increasing the use of non-Chinese components.

The second ‘event’ is the long-term concern over greater political decoupling in the event of a breakdown in relations between China and the international community.

Although most international groups are unlikely to fully leave the Chinese market due to its size, they expect the flow of components from the country to factories around the world to decline over time. As a result, foreign manufacturers are seeking to produce parts and cars within China exclusively for domestic use, FT reports.

This move reduces their reliance on Chinese factories for goods sold abroad, while at the same time maintaining a secure local supply chain for their own operations in the country. A quarter of exported Chinese auto parts currently end up in American factories, according to a report from Sheffield Hallam University in December, which highlighted the country’s rise as a global supplier over the past two decades.

China and Russia have surprised the world

Automotive executives draw parallels between China and their experience in Russia following Vladimir Putin’s invasion of Ukraine. Major manufacturers like Renault and Mercedes-Benz were forced to close or sell factories in Russia, while key components, such as palladium, had to be sourced elsewhere.

– I think (the auto) world was surprised by Russia and Ukraine. The relationship between the US and China is tougher than it was before… this is the new world we live in – said Cannis.

However, the ‘shock’ in the supply chain will last as car manufacturers rarely change component sources until the end of a vehicle’s life cycle, which is about seven years. This could also prove costly for an industry that already operates on thin margins.

– I don’t think finding sources is the problem. It’s the price that changes – said Tom Narayan, an automotive analyst at RBC.

– If everyone tries to switch to the same European or American providers, you limit supply and the price will go up – he added.

Ted Mabley, a consultant at PolarixPartner, said that moving out of China will ‘bring an increase in both labor and material costs’. This means that car manufacturers must find savings elsewhere, especially with rising costs associated with the transition to electric power, or risk becoming uncompetitive.

– If we don’t solve the affordability issue, the middle class won’t buy electric vehicles – said Stellantis CEO Carlos Tavares.

– If 85 percent of the total vehicle price consists of parts, and you don’t act on that 85 percent, you won’t have an impact. This requires us to use low-cost countries. China is not the only one, nor even the best. There are many options in India, Mexico, and parts of North Africa and Asia – he added.

Everyone is looking for an exit from China

However, car manufacturers also want to be more rigorous in selecting suppliers as they focus on supply chain resilience as well as costs to ensure they won’t break down.

– This is no longer an era where price is the main driving factor. Right now, we need to consider the robustness of our supply chain to ensure stable parts procurement – said Masahiro Moro, senior executive officer at Mazda.

Mazda has stated that it is shifting the production of some components made in China to its domestic market in Japan. This is a sign that even Japanese car manufacturers, who are less dependent on the country than their competitors in Europe or the US, have begun to reduce their reliance on supply chains in China.

Japan-based Honda confirmed that it is considering ways to reduce supply chain risks, although it denied media reports stating that the company is exploring the possibility of producing cars and motorcycles with as few parts made in China as possible.

– With a range of supply chain impacts due to multiple factors, including the quarantine in Shanghai, we are considering various ways to protect against supply chain risks. However, we are not considering a scenario of decoupling from China – the company stated.

Supply chain risks are greater for German car manufacturers like Mercedes, BMW, and especially Volkswagen.

The three are so deeply rooted in China that, along with the German chemical group BASF, they accounted for a third of all European direct investments between 2018 and 2021.

– The Germans are so tied to China, not just for procurement but also on the customer side. This is actually the biggest risk that investors are looking at right now – said Narayan from RBC.

However, Jörg Burzer, head of supply chains at Mercedes-Benz, emphasized that all changes in parts procurement for the company are not driven by political reasons.

– It’s not about China or the US, but about the best setup for the supply chain and operations – he said at the Global Boardroom summit for the Financial Times in December.

– Of course, we are looking at sources that are nearby, which can also be from European, American, or Mexican suppliers – he added, emphasizing that it is not about the nationality of the supplier.