China continues to be a key supplier of auto parts for the U.S. despite an ongoing trade war between both countries, but potential obstacles — including the new coronavirus outbreak and new North American trade deal — could impact imports from the country, experts said.
China accounted for 10.3% of U.S. auto parts imports in the year through Nov. 30, 2019, down from 13.1% in 2018, according to data from Panjiva, a business line of S&P Global Market Intelligence. Experts said they had expected a larger drop given the trade war. The U.S. has imposed tariffs on more than $360 billion of Chinese goods, including 25% duties on imported auto parts. China has retaliated, but there are signs that tensions are starting to ease with the recent "phase one" trade deal between the countries.
Switching supply chains to another country can be costly, which might be part of the reason carmakers decided to stick it out with China, experts said, citing China's low costs and existing supply chains. But they also warned of potential challenges on the horizon. The new United States-Mexico-Canada Agreement could keep North America in the mix for sourcing.
Automakers such as Tesla Inc., Hyundai Motor Co. and Toyota Motor Corp. have also said the new coronavirus outbreak is disrupting production in the region. But those disruptions will be temporary as long as the outbreak does not last too long, experts say.
"I think China will continue to be a major source of auto imports based primarily on cost," said Bill Selesky, senior research analyst at Argus Research. "They continue to be the lowest-cost producer in the world, and we don't see much changing with that yet."
China sourcing down, not out
U.S. imports of auto parts from China fell 21% to $10.94 billion in the 11 months through Nov. 30, 2019, compared with the same period in 2018, according to Panjiva data. The drop follows the imposition of the tariffs in 2018 and automakers' unsuccessful attempts to seek exemptions for some of the items, including auto parts, targeted for the duties.
However, China remains "a highly reliable, low-cost provider that car manufacturers love," Selesky said.
"The trade war complicates things, but it looks like we're doing good with phase one and hopefully that continues," Selesky said. "If it does, I would expect imports from China to strengthen, not fall."
Automakers would need a material advantage to switch supply chains, Selesky said. Importing parts from another country that offered a 10% drop in cost, for example, would not be enough.
"In my opinion, it would have to be on the order of 20% to 25%, then they would do it," he said, adding that Mexico, Ecuador and possibly Brazil could be alternatives to China.
Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said there was not as much movement away from China as one might expect.
"Supply chains are about long-term investments and cannot be moved quickly," Lovely said Jan. 22, speaking as part of a panel connected with the Washington Auto Show.
Cost and alternatives
Pin Ni, president of auto parts manufacturer Wanxiang America Corp., said he visited other countries in 2019 to find sourcing alternatives but came back empty-handed. The company is a subsidiary of privately owned Wanxiang Group Corp., which sells auto parts globally.
"We've been very transparent to the customer, saying we can go anywhere on this planet that you want us to go, but … if we need to incur additional cost, we have to share it with you," Ni said at the Jan. 22 auto show.
Ni said Thailand's labor rate is lower than mainland China's, but the cost would actually be higher for Wanxiang's business because of the need to bring necessary equipment to Thailand from China.
"A small country is going to be very difficult given the magnitude of the business," he said.
It is costly for automakers to shift suppliers in terms of delivery speeds, quality and price, said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.
"My guess is that automakers will stick with present supply arrangements and see how phase one plays out," he told Market Intelligence.
However, automakers could be reluctant to expand their supply chains in China, instead opting to expand elsewhere, he said.
General Motors Co. said it is "pleased" that China and the U.S. are working toward sustainable trade policies.
"We continue to believe both countries value a vibrant auto industry and understand the interdependence between the world’s two largest automotive markets," GM said in an email to Market Intelligence.
Fiat Chrysler Automobiles NV declined to comment on the company's sourcing strategies.
Trade deal, outbreak could shift balance
The new North American trade deal, the USMCA, could also prompt sourcing changes in the future, said Charlie Chesbrough, senior economist with Cox Automotive.
The deal requires 75% of a vehicle's components be produced in North America to qualify for duty-free treatment, up from the 62.5% requirement under the North American Free Trade Agreement.
"Given the ongoing threat of tariffs, and Democrats not really opposed, more protectionism seems likely and domestic sourcing is one way to mitigate the risks," Chesbrough said.
The USMCA will probably have a minor impact on imports from China in the near term, while the ongoing coronavirus outbreak could also affect the country's supply chain, experts said.
The outbreak in China has already impacted businesses and operations as companies try to limit exposure to the virus. Some companies, including automakers, have banned or limited travel to China, while factories and stores have temporarily shut down. The U.S. State Department has also issued a travel advisory recommending U.S. citizens do not travel to China.
Electric carmaker Tesla said the outbreak could delay production of its Model 3 cars in Shanghai up to one and a half weeks. Toyota is considering sourcing from countries other than China because of the outbreak, Reuters reported.
Hyundai is suspending production in South Korea because of supply chain disruption from the coronavirus, becoming the first major automaker to suspend production outside China because of the virus.
"I don't think there will be much of an impact in the near term [from the outbreak]," Selesky said. "If things get substantially worse, say from June through the end of 2020, then imports would likely feel a negative impact."
As automakers take strong precautions against spreading the virus in the workplace, the companies will lose workers for a while, Hufbauer said.
"That will slow production a bit," he said, adding that there could be some reduction in parts imports.