Car Companies Pulling Out of China

Categories: Industry News

Car Companies Pulling Out of China

It’s been a tough few years for China/American relations.  Faced with COVID lockdowns, U.S.-China tensions of Taiwan, and now an indefinite power cut in China’s heartland, companies are exploring how to divert their supply chains away from China.

On Wednesday, the Japanese newspaper Sankei reported that carmaker Honda was considering building a parallel supply chain outside of China to lessen its dependence on the country. Forty percent of the carmaker’s production is currently done in China. A Honda spokesperson characterized the plan as “risk-hedging” in a statement to Reuters, but said it was “not quite the same” as decoupling.

Fellow Japanese carmaker Mazda is also considering moving production out of China. Earlier this month, the company reported an operating loss of $115 million for the previous quarter due to production snags caused China’s COVID lockdowns. In response, the company said it would build stockpiles of components in Japan and look for new manufacturing outside of China. “The key point is to keep [parts] in our hands,” given China’s COVID-zero policy, Honda senior executive Takeshi Mukai told Reuters.

While China becomes an industrial giant and has become a global player, there have been many missteps and challenges along the way. Patent. trademark infringements, counterfeit goods, and allegations of industrial spying have many companies, not just automotive companies and their sub-suppliers rethinking the approach of relying on Chinese suppliers.

Nearly 40% of Honda’s automobile production took place in China in the last financial year.

Honda would continue to keep its supply chain in China for the domestic market in the world’s second-largest economy while building a separate one for markets outside of China, the Sankei said. It did not say where it got the information.

A Honda spokesperson said the Sankei report is not something announced by the company, adding it has been working on reviewing and risk-hedging its supply chain in general.

Silicon Chip Shortages Causes Mass Production Shutdowns

Ford has something like 60,000 vehicles waiting for silicon chips. Can you imagine if more critical resources were locked behind the red tape of an autocratic system?

How did we get here. A little history:

For many years, China was the most important country which required an annual waiver to maintain free trade status. The waiver for the PRC had been in effect since 1980. Every year between 1989 and 1999, legislation was introduced in Congress to disapprove the President’s waiver. The legislation had sought to tie free trade with China to meeting certain human rights conditions that go beyond freedom of emigration. All such attempted legislation failed to pass. The requirement of an annual waiver was inconsistent with the rules of the World Trade Organization, and for the PRC to join the WTO, Congressional action was needed to grant permanent normal trade relations (PNTR) to China.This was accomplished in 2000 with the United States–China Relations Act of 2000, allowing China to join WTO in 2001. China’s most favored nation (MFN) status was made permanent on December 27, 2001.

President Bill Clinton in 2000 pushed Congress to approve the U.S.-China trade agreement and China’s accession to the WTO, saying that more trade with China would advance America’s economic interests: “Economically, this agreement is the equivalent of a one-way street. It requires China to open its markets—with a fifth of the world’s population, potentially the biggest markets in the world—to both our products and services in unprecedented new ways,” said Clinton.

In a speech in 2000, Clinton reiterated his hopes:

For the first time, our companies will be able to sell and distribute products in China made by workers here in America without being forced to relocate manufacturing to China, sell through the Chinese government, or transfer valuable technology—for the first time. We’ll be able to export products without exporting jobs

That last claim didn’t age well. The opposite has occurred. The USA’s goods trade deficit with China in 2020 was $310 billion dollars – in China’s favor.

As Americans look for cheap prices, and American manufacturers of goods, whether they’re iPhones, computers, TVs or electric cars, at some point, the situation will crystalllize.