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Car makers cut reliance on China.

Car makers

Over the past 20 years, China has risen from obscurity to become a global leader in the car parts industry. Its growth was fuelled by European and American carmakers that farmed out the production of an increasing number of their components to China to save costs and establish links with the world’s largest car market. But international groups have now launched a quiet yet concerted effort to cut their reliance on China’s sprawling network of components makers, according to industry executives and supply chain experts. The first is the uncertainty caused by China’s zero Covid-19 policy that forces plants to close at short notice.

«The longer the pandemic stretches, the more uncertainty there is,» Volvo Car boss Jim Rowan said earlier this year when announcing the Geely-backed carmaker was increasing its use of non-Chinese components. But the second is a longer-term concern about a more significant political decoupling in the event of a breakdown in China’s relations with the international community, similar to Russia’s, that could threaten trade. Although most international groups are unlikely to abandon the Chinese market entirely because of its size, they expect the flow of components from the country to plants worldwide to fall over time. Consequently, foreign manufacturers aim to make parts and cars inside China exclusively for use within the country.

This cuts their reliance on Chinese factories for goods sold overseas while retaining a secure local supply chain for their plants inside the country. For example, a quarter of China’s exported car parts are in US plants. A December report from Sheffield Hallam University highlighted the country’s rise as a global supplier over the past two decades. «I don’t think the sourcing is the difficulty. » Ted Mabley, a supply chain consultant at PolarixPartner, said moving away from China «will be looking at a price lift for both labour and material».

This means carmakers must make savings elsewhere, particularly with costs rising in the switch to electric, or risk becoming uncompetitive. However, carmakers are also aiming to be more rigorous in their choice of suppliers as they focus on the resilience of the supply chain and costs to ensure it does not break down. For example, Mazda said it was shifting production of some components made in China to its home market in Japan. Mazda has already asked more than 200 suppliers that use parts made in China to stock up on inventories in case of disruptions.

Japan-based Honda admitted it was considering ways to cut supply chain risks. However, it denied media reports that it was exploring the possibility of building cars and motorcycles with as few China-made parts as possible. The company added that «most of our sourcing in China is for production in China» and «we plan to continue this approach». Supply chain risks are more significant for the German carmakers Mercedes, BMW and, particularly, Volkswagen. The three are so deeply embedded in China that, alongside German chemicals group BASF, they accounted for a third of all European direct investment between 2018 and 2021.

«The Germans are so tethered to China, not only for sourcing but on the customer side too,» said RBC’s Narayan. «We look at the sources nearby, which could also be from European or US suppliers or Mexican suppliers,» he added.

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