Carmakers Considering Cutting Ties With China Due to Persistent Supply-Chain Issues, Political Tensions

Tesla China-made Model 3 vehicles during a delivery event at the carmaker's factory in Shanghai, on Jan. 7, 2020. (Aly Song/Reuters)

After setting up shop in China to take advantage of its cheap, massive labor force, multiple carmakers are now planning to cut off ties with the Asian nation after concerns about supply chains arising from geopolitical tensions and COVID-19 disruptions.

The decision by the automakers is driven by two factors. The first is worries about a potential political decoupling between the West and China, similar to what Russia has undergone in the aftermath of its attack on Ukraine. If China were to face similar sanctions from the West, it would be terrible for business. The second factor is the uncertainty created by Beijing’s Covid-19 policy, which often forces plants to shut down in case of an outbreak with short notice, thus disrupting production.

Though most automakers do not plan on abandoning China altogether as a market, given its vast size, some are said to be considering limiting their dependence on China for components and vehicles that are sold in other markets, according to the Financial Times. So, basically, the foreign manufacturers plan to only make cars and parts in China for sale within the nation.

Ted Cannis, a senior executive at Ford, pointed out that there is a “large-scale rethinking of logistics operations” happening across the auto industry, according to the Financial Times. The main focus of the decade would be supply chains, he added.

Earlier this year, Volvo Cars CEO Jim Rowan said that the longer the COVID-19 pandemic lasts, the more uncertainty it will create. At the time, he was announcing the firm’s decision to increase non-Chinese components.

Although China is opening up, leaked data from the country’s National Health Commission showed hundreds of millions of people contracting COVID-19 in December. Nearly 37 million people are estimated to have contracted the virus in a single day.

Carmaker Exits

In October, carmaker Stellantis announced that its joint venture in China had filed for bankruptcy. Earlier, its CEO, Carlos Tavares, said that there has been “more and more political interference” in the business sector in China. The company does not want to become a “victim of cross-sanctions,” he said in an interview with Bloomberg.

“I do not expect Stellantis to be an isolated case,” Marco Santino, a partner at management consultants Oliver Wyman, told Reuters. “Probably almost all of the Western carmakers will have to review the industrial logic of their presence in China.”

A Fortune report in August said that Japanese carmakers like Honda and Mazda were considering moving production outside of China to minimize dependence on the country.

This month, Czech carmaker Skoda Auto, which is part of Volkswagen, announced that it is thinking about exiting China and will take a final decision on the matter by next year.

“The competition is very intense there, so we will consider, together with our Chinese joint-venture partner, how we want to proceed,” Zellmer was quoted as saying by the German magazine Automobilwoche. “If we want to focus our energy, it’s worth checking all scenarios and then deciding.”

Human Rights

In the United States, pressure to decouple from China is not only due to geopolitical factors but also because of human rights issues.

Senate Finance Committee Chair Ron Wyden (D-Ore.), for example, recently questioned eight automakers, including General Motors, Tesla, and Ford, about their ties to Chinese supply chains over reports that they might be sourcing materials from the Xinjiang region in China known to practice forced labor.

“The United States considers the Chinese government’s brutal oppression of Uyghurs in Xinjiang an ‘ongoing genocide and crimes against humanity,’” Wyden wrote in a letter to the automakers, according to a press release on Dec. 22.

“I recognize automobiles contain numerous parts sourced across the world and are subject to complex supply chains. However, this recognition cannot cause the United States to compromise its fundamental commitment to upholding human rights and U.S. law.”