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As factories stayed closed across China’s industrial heartland following the coronavirus outbreak, auto executives from Tokyo to Detroit scratched their heads, asking the same question: How would this hit them?
They had good reason — disruption to the supply chain is bad enough, but the average car uses thousands of parts, and who can say where they all come from? Anyone? (Jaguar Land Rover obviously knew what it needed when it flew components out of China in suitcases.) Read more about the parts problem in our lead piece. And think about it the next time you look under your car’s hood.
In today’s Tall Tales of Trade, we wonder if Beijing shares Donald Trump’s view that the US is not “a difficult place to deal with”, while our chart of the day shows how car shippers are facing some choppy waters.
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Trying to keep the wheels turning
“I genuinely don’t know what the impact of the current issues are,” one senior auto executive admitted over WhatsApp in the jaws of the coronavirus crisis.
As the coronavirus outbreak spread, component makers held crisis meetings to try to determine where their parts came from, and if they could keep on supplying their auto manufacturing customers.
Fiat Chrysler admitted one of its European sites was weeks away from closing; Hyundai shut some Korean facilities, Nissan closed a Japanese site, and JCB in the UK has cut production and working hours.
The truly global nature of the automotive supply chain was laid bare.
The brutal realisation — that no one, anywhere, actually knows where every single one of the 3,000 parts that go into the average car comes from — should be heeded by politicians eyeing a rash of trade deals.
Britain is seeking to forge agreements in record time to cushion its exit from the EU, ranging from a European deal to a US agreement.
For carmakers, the heart of the deal will be a complicated calculation of where their parts come from, known in trade as the Rules of Origin.
A car plant, with its impressive array of robotic arms wielding car doors and its antlike legion of assembly workers, is actually responsible for less than 10 per cent of the value of a finished vehicle.
Almost all of it comes through the factory door, from suppliers that range from gearbox makers to dashboard manufacturers.
Working out where those parts — and where the components that went into them — come from, is, as the coronavirus has shown, incredibly difficult.
This issue was front and centre of the USMCA trade deal signed between the US, Canada and Mexico — the successor deal to Nafta — where Rules of Origin was the major sticking point.
Even the Ford Mustang — the iconic American muscle car raced by Steve McQueen around the streets of San Francisco in Bullitt — has parts from Mexico, China and Belgium woven into its guttural eight-cylinder gasoline engine.
If Britain wants its cars to avoid tariffs after Brexit, knowing where its parts are sourced from is an important question.
A certain number of parts that go into a vehicle must be “local”, to qualify the finished vehicle for exemption from tariffs. This level typically sits at about 55 per cent.
Britain, while part of the EU, counts European parts as “local”, and thereby sails past the threshold. Once “local” means “British”, the task becomes daunting, because the supply chain has been whittled out over years of under-investment.
Several years ago, I sat down with a then-trade minister to talk about Rules of Origin. He proudly told me that 40 per cent of the Tier 1 parts used in UK plants came from Britain. What, I asked, about the Tier 2 content? A blank stare.
“We should probably look into that,” he said, as an aide began furiously scribbling.
Since that meeting, the trade department arm tasked with rebuilding Britain’s supply chain — the Automotive Investment Organisation — has had its budget slashed.
One viable solution for the UK car industry is if European parts are counted as British under what is called “bilateral accumulation”. This would help the 50 per cent of UK car exports that go to the EU.
But it would do nothing for the 20 per cent of sales that go to nations with EU trade deals that the UK currently freely accesses, such as Mexico, Canada or Korea.
Allowing European parts to count towards those sales would involve “diagonal accumulation”, which requires the existing trade deal between the EU and Korea to be reopened and changed. This is something that the EU is unlikely to want, given that Korea may want to make other treaty changes because Britain, Europe’s second-largest car market after Germany, is no longer part of the bloc.
Charted waters
Car sales around the world were expected to see their steepest year-over-year decline in 2019 since the financial crisis as consumer demand from the US to China softened, CNBC reported towards the end of last year.
Tall Tales of Trade
Donald Trump took to Twitter to clear up a few of the finer points of Washington’s trade policy again this week (we are eternally grateful), writes Aime Williams. The US, said Trump, “cannot, & will not, become such a difficult place to deal with for foreign countries buying our product, including for the always used National Security excuse, that our companies will be forced to leave in order to remain competitive”.
Two things jump out here. The first is the off-kilter reference to the national security “excuse”. The Trump administration has justified tariffs and export controls on national security grounds, often in a way legal experts argue is spurious — is this a case of the president being a little too candid?
Cut to the commerce department, which has, of course, blocked a lot of US companies from selling to Chinese groups. Huawei, most notably, is subject to pretty tight restrictions. While export controls used to be a nerdy footnote to Washington’s broader trade policy, Trump has used them with unprecedented zeal since he came to office.
As recently as this week, US media reports have suggested that more controls are in the offing: the Wall Street Journal reports that jet engines co-produced by General Electric could be blocked from being shipped to China.
All of this is to say: Beijing might not share Trump’s view that the US is not “a difficult place to deal with”.
Don’t miss
- Dream holidays have become a nightmare for cruise passengers caught in the middle of China’s coronavirus outbreak. More than 50 cruises have been cancelled, seven ports closed and thousands of holidaymakers’ plans disrupted as authorities scramble to prevent the spread of the virus. Though instances of infection have been limited to two ships, the $45bn cruise industry faces a battle to regain customer trust.Read more
- A Twitter spat erupted yesterday between London and Brussels over the approach to trade talks, as the atmosphere soured ahead of the start of negotiations. The UK wants a Canada-style free trade agreement, but with its trading clout and location so close to the bloc, how likely is that?
Read more - For all our fears about artificial intelligence becoming far too clever — as it uses machine learning on huge data sets to give it superhuman powers — people are thankfully still pretty good at making AI look like an idiot.
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Tokyo talk
The best trade stories from the Nikkei Asian Review
- The international retail giant behind Uniqlo runs the risk of becoming another Japanese company under fire for hoarding funds at the expense of capital efficiency, as it declines to spend any of its $10bn in cash holdings on acquisitions.
Read more - After Prada postponed its first fashion show in Japan, other multinational companies are avoiding business activities there over fears that it could be the next hotspot in the coronavirus outbreak.
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