Decades of liberalisation of international trade relations, including the removal of many tariffs and non-tariff barriers, have enabled automotive supply chains to develop on the basis of economic rather than political imperatives. This is no longer the case. Governments right across the political spectrum have started to adopt protectionist policies whilst promoting subsidy-driven national industrial strategies, challenging the mantra of free trade and open markets.
This development, accelerated by the Covid pandemic, is of critical importance to automotive manufacturers which not only rely on global value chains for the supply of intermediate goods, but are also heavily invested in international markets, most importantly China and North America. Consequently, intergovernmental relations and geopolitics are crucial to production and supply chain decisions.
President Biden’s Inflation Reduction Act (IRA) is an example of how a shift towards nationally focused subsidy policies, can have global implications. The act will mean that electric vehicles made by large automotive manufacturers will become eligible for tax credits worth $7,500, stimulating electric vehicle (EVs) sales. However, in order to qualify, the final assembly of these EVs must take place in the US. In addition, batteries will be required to have at least 50% North American content, rising to 100% in 2028 and mineral content from China and other ‘foreign entities of concern’ (eg Russia) will need to be reduced to 20% by 2026, replaced instead by materials sourced from ‘free trade’ partners.
Whilst these regulations may have been aimed at China, the fact that the EU and UK do not have free trade agreements (FTAs) in place means that they are similarly affected. Every EV manufactured by companies such as GM and Tesla in the US will in effect be subsidised, depressing the sales of imports from their European competitors. The EU sees the legislation as discriminatory and is considering taking the US to arbitration under WTO rules if discussions cannot resolve the issues. “We are in talks with the Americans so we do not start a kind of trade war now,” German economy minister Robert Habeck is reported as saying. The fear is that European manufacturers will move substantial parts of their production and supply chain to the USA.
East and west
The USA is not the only country to subsidise its automotive industry. The Japanese government has created a $2 billion fund for businesses to redesign their supply chains with the intention of lessening their dependence on China. China currently accounts for nearly a quarter of all Japanese imports and in sectors such as automotive parts it is even more crucial, accounting for nearly 40%.
Relations between Europe and China are also problematic. Rising tensions over Taiwan, the fallout from Covid lockdowns, security, cyber-crime, the treatment of the Uighur community and the projection of China’s influence throughout the developing world, has prompted the EU to adopt a goal of ‘strategic autonomy’. That being said, there is little consensus amongst partners on what this aspiration will actually mean for the EU in terms of industrial and trade policy. Germany’s economy is highly dependent on trade with China and its automotive industry is one of the biggest foreign investors in manufacturing plants in the country. France, however, has been keener on a more mercantilist approach predicated on the goal of building and protecting ‘national heroes’. This has led to tensions between Europe’s largest economies, laid bare when President Macron’s demand to join a visit organised by Chancellor Scholz to meet President Xi Jinping in China in 2022 was rebuffed. Scholz has also been very vocal in distancing himself from talk of ‘de-coupling’ and ‘de-globalisation’ such is the concern over alienating its biggest trade partner.
However, this has not stopped the European Commission announcing a probe into whether China’s subsidy of its EV industry gives it an unfair pricing advantage. Imports of EVs from China already attract 10% tariffs, but this is considerably less than the 26% levied in the US. The investigation may lead to an increase in this rate, and whilst this may protect European car manufacturers it will do nothing to stimulate adoption of EV usage. In any case, Chinese manufacturers may well either invest in plants in Europe to circumvent any new tariffs or diversify to other markets in south-east Asia, such as Thailand.
The growing level of global political, economic, ethical and environmental risk is encouraging many automotive manufacturers and suppliers to build more local and regional supply chains, in other words, near-shoring. Partly as a result, Turkey, a member of the EU’s Customs Union, has become one of Europe’s most important centres for automotive production, deeply integrated within the region’s parts and finished vehicle supply chains. The sector also benefited from China’s zero-Covid policy which resulted in many vehicle and parts manufacturers switching to Turkish suppliers during periods of lockdown. Higher production costs in Turkey compared with Asia are balanced by the benefits of shorter transit times, resilient logistics networks, the ability to react faster to market developments, as well as, of course, frictionless trade.
What is clear is that supply chains, already uncertain and volatile, will become ever more complex in the future as politics and ideological imperatives become as important as economic considerations. Whilst JIT, lean inventory, right-first-time and the host of other established management techniques will remain engrained in industry practice for years to come, supply chain strategies will increasingly need to be able to mitigate an evolving set of risks. This will require a new set of skills, experience and expertise for managers unused to operating in a such a challenging political environment.
John Manners-Bell is chief execuitive of Transport Intelligence and CEO of the Foundation for Future Supply Chain. Hisnew book The Death of Globalization: How politics, ethics and the environment are transforming global supply chains has just been published by Sea Pen Books