The position of the top exporter of auto parts in the world has changed under multiple challenges?

SMM News: for more than a decade, China has always been the main source of global auto parts and materials because of its cost advantage, but the global automobile supply chain is changing.

The production capacity of auto parts is gradually transferred from China.

Last year, Hyundai Mobis, the world's seventh-largest car parts supplier, said it would close an overseas manufacturing plant and build a new electric car parts plant in Ulsan, South Korea. At the time, the company did not mention China. However, while preparing to increase investment in South Korea, the company has slashed production at its Chinese factories.

Similarly, an exterior parts supplier at Mazda's Guanajuato car assembly plant in Mexico increased its production capacity in Mexico by 50 per cent and cut an assembly line at a factory in Jiangsu, China. Mazda is reported to have paid more than $5 million in additional costs as China faces growing challenges in the logistics and transportation of auto parts.

While international auto parts suppliers are cutting production in China, local parts suppliers are also looking to build factories overseas. Minshi Group, which has established production facilities in Mexico, is an interior and exterior parts supplier to a number of North American carmakers. Last year, its global sales reached $2 billion, of which $419 million were sold to North American customers.

Minghua (Minghua), another Chinese parts supplier, also set up a factory in Greer, South Carolina, two years ago to supply injection molding parts to nearby BMW's US plant. Minghua has said it will invest $33.9 million in Puebla, Mexico, to support its growing customer base in North America without having to deliver goods from China, according to the China-Mexico Research Center of the National Autonomous University of Mexico ((National Autonomous University of Mexico)). Supply parts there for Volkswagen and Audi.

This may be an important moment for China. Previously, China has been the main source of global auto parts and materials; at present, spare parts production is gradually shifting, production is withdrawn from China, and automotive products are beginning to flow back to North America; in the future, the growth of the industry may directly skip China and shift to other production sites.

China's auto parts trade faces multiple challenges

While China continues to export billions of dollars worth of car parts to carmakers in North America and elsewhere every year, the situation has changed in the past two years, and China's auto parts trade has been hit by multiple challenges at the same time.

1. Sino-US trade friction

According to data from the US Department of Commerce, due to factors such as Sino-US trade frictions, US imports of auto parts from China decreased by nearly 1/4 in 2019, and the trade volume fell to US $15.3 billion; over the same period, US auto parts imports from South Korea increased by nearly 10% to US $9.1 billion, while imports of auto parts from Thailand increased by nearly 23% to US $4.3 billion.

The reduction in U. S. imports from China is not limited to the auto industry. According to consulting firm Kearney (Kearney) 's 2020 return index, (Reshoring Index), u.s. imports from china fell by 17% last year, meaning that about $90 billion worth of Chinese goods have been replaced.

A parts supplier of electric motors in Zhejiang said in an interview with Geshi, "We are export-oriented parts and components enterprises, mainly export-oriented." It turns out that our orders were won from Taiwan, Japan, South Korea and other enterprises. Before, we had a cost advantage, and then we gradually gained an advantage in quality. Now that tariffs are increased, our cost advantage is no longer obvious. at this time, customers will certainly compare prices and choose partners with higher performance-to-price ratios, such as Taiwan, Japan, South Korea, and other enterprises. This is not impossible. "

Doug Mehl, a partner in Kearney's automotive business, believes that "countries such as Indonesia and South Korea have the ability to produce high-quality automotive products." For automakers, shortening the supply chain while reducing labor costs is a better option so that they can respond to changes in sales or logistics in a timely manner. "

2. The rise of emerging countries

Over the past decade, China has quickly become a major source of American car products, thanks in large part to cheap labour. Today, China's rising labor and production costs are prompting many companies to look elsewhere. The rest of Asia has joined the competition with more attractive cost advantages, scrambling to provide cheaper labour and space, and the manufacturing landscape in emerging countries such as Vietnam, India and Thailand has gradually undermined China's position.

Vietnam is one of the beneficiaries of this shift. Compared with China, Vietnam has a younger labour force, lower wages and a more predictable and stable political system than other Southeast Asian countries, all of which make Vietnam a less risky region. Last year, U.S. manufacturing imports from other Asian countries increased by $31 billion, nearly half of which came from Vietnam. In the first quarter of this year, Vietnam also received new foreign investment related to vehicle production and spare parts.

In addition, the new US-Mexico-Canada trade agreement, (USMCA), makes Mexico a more attractive supplier of raw materials. The North American Free Trade Agreement previously stipulated that 62.5 per cent of imported car parts would be duty-free if they were from North America; the new USMCA agreement raised the threshold to 75 per cent within three years, with various regulations attached. This puts new pressure on carmakers to buy parts from the US, Canada and Mexico. Mexico naturally has a cost advantage over the United States and Canada. Last year, us imports from Mexico rose 3 per cent to $61.6 billion.

3. Global automobile supply chain reconstruction caused by epidemic outbreak

The novel coronavirus outbreak and the resulting parts supply cuts and global factory shutdowns have made carmakers more cautious about supply chains that rely on the other side of the ocean.

According to the China Automotive Industry Information Network, at present, there are more than 100000 local auto parts companies in China. These parts companies create more than 80% of the world's auto parts. According to data from the General Administration of Customs in 2019, Chinese auto parts companies exported more than $60 billion last year, of which foreign subsidiaries accounted for 40 per cent of foreign exports.

Hubei Province, which first broke out at the beginning of the year, is precisely a major province of the automobile industry. Wuhan, which is in the swirl of the epidemic, is not only one of the four major automobile production bases in China, but also gathers world-renowned auto parts manufacturers such as Valeo, Zaifu, Weibaster, Bosch and so on. Therefore, the blockade of Hubei in this epidemic has had a great impact on the production and transportation of spare parts. Widespread plant shutdowns caused by disruptions in China's car supply chain have also quickly spread from China to Japan, South Korea and the rest of the world.

Jennifer Blackhurst, a professor of business analysis who studies supply chain risk management and shortening the supply chain at the Tippie School of Business at the University of Iowa, said: "before the outbreak, companies had already discussed 'nearshore production' and 'parts supply chain return', which are no longer new terms. But then, the pandemic disrupted the global auto parts supply chain, causing people to panic, which really highlighted the need to re-examine the best way to design and manage global supply chains. "

Blackhurst believes that how to redesign the supply chain after the epidemic is a common concern for enterprises, although this does not mean withdrawing the production of all components from China. But in the future, more companies will re-examine their sources of supply. "We will see more companies entering low-cost countries or returning to the United States".

Will China's position as a big exporter of auto parts be shaken?

Trade tensions between China and the US, the rise of emerging countries and the combined impact of the epidemic have prompted carmakers and parts suppliers to consider other markets and diversify their capacity and product portfolios to other areas with lower risk, greater potential and more cost advantage.

Last month, a senior Trump administration official said at a news conference that the US government wants to shift more trade activity to Mexico and Latin America. "We plan to bring the supply chain home." the supply chain will be realigned from east to west to north to south. During the epidemic, companies really felt the benefits of the supply chain from north to south, and it was easier for them to cooperate with these countries than east-west supply.

Michael Dunne, chief executive of ZoZo Go, a consulting firm that works with Chinese carmakers, believes that the shift in the supply chain out of China is gradual and more of a marginal adjustment to minimise desperate risk.

In fact, even if automobile companies and parts suppliers realize the necessity of reconstructing the supply chain, the redesign and transfer of the supply chain is not easy to achieve. Once you take into account the huge investment needed to build factories around the world, as well as the cost of subsequent research and development, automation and robotics, it will not only push up costs by moving the supply chain from China or Asia to Mexico or elsewhere, it will take months or even years to achieve.

In addition, not all enterprises are willing to bear the cost of transferring the supply chain, and suppliers will transfer the supply chain only when the customer is ready to transfer the supply chain. Jacques Aschenbroich, CEO of Valeo, said, "if we replan and deploy the supply chain, our end customers and auto parts customers will not be willing to pay higher prices. If neither of these parties attaches importance to risk, it is impossible for the supply chain to be rearranged. "

GM spokesman David Barnas also said the company does not expect its procurement strategy to change significantly due to existing challenges in the Chinese market and the impact of the epidemic. "only a small number of parts in our North American plants come from Tier 1 suppliers in China, and although we will continue to evaluate possible situations and adjust our decisions, we do not expect a major change in our current procurement strategy."

On a broader level, when the epidemic breaks the existing global automobile industry chain, it is not just China that will be affected. The honorary director of the Chinese Society of Automotive Engineering acknowledges that the future adjustment of regional and structural supply chains is a trend, but he also points out that global automotive supply chains will adjust, not just China.

In fact, China will still be an advantageous combination of efficiency and scale, which is incomparable in other regions. As Zhao Fuquan, president of the Institute of Automotive Industry and Technology Strategy of Tsinghua University and president of the World Federation of Automotive Engineers, said, "despite the rising costs in China, because China has the largest market and the most complete industrial chain in the world, on the whole, the attraction of investment is still very strong, and we do not have to worry too much about the capacity transfer of some foreign companies."