Auto parts represent a significant part of the $200 billion worth of Chinese goods that are now under tariff. So what happens to the global auto parts supply chain if the tariffs continue for a protracted period…
At the end of September, the Trump administration began to impose Section 301 tariffs on billions of dollars of Chinese-sourced auto parts, an initial 10% duty that will increase to 25% on January 1, 2019. This action impacts thousands of companies, threatens hundreds of thousands of American jobs and wreaks havoc on the global supply chain that supports an enormous industry. The steep import duties affect everything from shipping lanes to auto repair shops, with increased costs being passed up and down the chain.
Washington is also examining an additional 25% tariff on imported vehicles and auto parts the Trump administration has threatened under the guise of national security. These Section 232 tariffs are similar to the duties the administration levied on steel and aluminum earlier this year. And Trump is threatening to slap duties on all Chinese imports that have so far avoided tariffs.
Uncertainity in the Supply Chain
“Probably the hugest uncertainty is how to build your supply chain because no one really knows how this will play out in the future or when these tariffs will begin or end,” said Aaron Lowe, senior vice president of regulatory and government affairs at the Auto Care Association, the trade group that represents the aftermarket auto parts industry.
Auto parts represent a significant portion of the $200 billion worth of Chinese goods Trump slapped tariffs on. The US imported last year almost $13 billion worth of Chinese auto parts, although not all are subject to the new duties.
Some auto parts suppliers have been caught out already. Lowe cited one importer of cabin air filters. When the shipment left China, there were no extraordinary duties. By the time the ship reached the US, the tariffs had already gone into effect, costing the company “a huge amount of money,” he said.
According to automotive parts industry consultant Steve Hughes, the lead-time for a Chinese manufacturer to produce a particular part typically takes anywhere from 90 to 120 days from receipt of order. Add to that time two weeks for the goods to cross the Pacific, plus several days for transit from a terminal to a warehouse or facility. “With an aftermarket company, you’re hoping you can get three turns of your inventory in a year,” Hughes said.
A steep rise in container shipping rates across the Pacific has already hurt auto parts importers, as it has importers of many other goods from China. The cost of shipping a container from China to the US has doubled since the end of April. That’s because demand for space on container lines skyrocketed. There was a rush to bring products into the US and stock up on inventory to gain both a price and strategic advantage over competitors. Importers of various goods anticipated Trump tariffs and wanted to beat the White House to the punch. What’s more, some importers report being bumped off ships if they refuse to pay spot rates, even if they have contracted for a cheaper rate. Ships in turn claim capacity issues have prevented them from carrying all the containers lined up for shipment.
“There is a lot of disruption and product flow and how it comes in,” said Lowe. “I don’t know how you even plan for something like that because there’s so much uncertainty.”
“Global supply chains are extremely complex,” added Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation. “You can’t turn them on and off like a light switch.”
The automotive industry now encompasses one of the most sophisticated and complicated supply chains on earth, with semi-finished goods, components and raw materials all crisscrossing the globe for production, assembly and distribution. Timeliness and quality are both absolutely essential. A missed delivery to a vehicle manufacturer can mean an entire assembly line is shut down. “That’s very critical and very costly to the vendor because they assume it’s your fault because you’re late,” said Hughes, a more than 40-year industry veteran. “At my old company, we would have to fly product in if our vendor was late just so we could make sure we wouldn’t stop the production line.”
According to Hughes, vehicle manufacturers need upwards of five years to develop a single vendor necessary for highly exacting standards, manufacturing prowess and capacity. It would take five to ten years to bring back onshore the auto parts industry, with investment requirements that would total hundreds of millions of dollars, he estimates. By the end of this process, the cost to the consumer would double or triple, he believes.
“That the administration is giving our industry 90 days to change our supply chain before they institute a 25% tariff is absolutely and utterly ridiculous,” said Hughes, the president and CEO of Los Angeles-based HCS International.
Reshoring and Retooling
The Auto Care Association cites brake rotors as an example. Approximately 2,600 different brake rotors are needed to service America’s used cars. Offshore manufacturers have made these aftermarket parts since the 1990s, said Hughes. China now produces some 80% of aftermarket brake rotors, which are manufactured to extremely high standards. “There are many quality Chinese suppliers that companies have grown to depend on,” said Lowe. “It would be nearly impossible for that to come back to this country any time in the near future.”
So-called “reshoring” this product to the US “could take up to 10 years and would require a significant financial investment to retool each individual part,” the association said in a September letter to the U.S. Trade Representative. “We’re not even sure the casting foundries in the US have the capacity to support the demand.”
It would be an extremely costly undertaking for the industry. As Hughes explained, brake rotor manufacturers must carry the cost of retooling. “US steel companies do not make the tooling on their own dime, they require the customer to do that,” he said, citing a study he conducted for the association in which he estimated the cost to each brake rotor manufacturer would be $50 million to $60 million.
Moving from China to another country, notably Mexico, is a slightly more realistic option for suppliers, but would still take years to accomplish. “The problem is finding companies with a certain expertise and the ability to produce quality products. In some areas, it’s probably easier than others. With brake rotors, it’s extremely difficult to move and still maintain the quality you need. You can’t just pack up and move,” said Lowe.
It’s also uncertain how the new trade agreement with Mexico and Canada, with enhanced content requirements, will impact this whole supply chain.
The auto parts industry has over the years become more and more a commodity-type business, Hughes said, with heightened competition and ever-tighter profit margins. Suppliers aren’t capable of absorbing the cost of the additional tariffs and will pass along price increases, which will cascade down the distribution stream.
Hughes also stressed that a 25% tariff translates into a cumulative effect that results in a much steeper product end-price. “Each level of distribution is going to mark it up appropriately. When it gets to the consumer, it’s not 25%, it could be a 50 or 60% tariff,” he said.
“We’re already seeing surcharges on products made of steel,” Lowe added.
Higher costs mean consumers will be more likely to defer maintenance. Lower demand will impact auto supply stores, mechanics, distribution centers, logistics providers, the entire gamut of downstream providers, warned both Hughes and Lowe.
“That will have a significant impact throughout the entire supply chain and impact a lot of different folks in a lot of different ways,” said Gold.
The Long Term Impacts of Tariffs
Even auto parts manufacturers who don’t depend entirely on China for products are feeling the pinch. Take, for example, HUSCO International, a Wisconsin-based company that makes hydraulic and electro-mechanical components used in off-road heavy equipment and in vehicles such as the Mercedes Benz. The company has manufacturing facilities in the US and England, as well as in Shanghai. The new tariffs are costing the company about $1 million a month, according to Austin Ramirez, the company’s president and CEO.
“The impact of the tariffs for us isn’t so much on HUSCO products coming across borders, it’s on our supply chain,” said Ramirez, on the Wisconsin Manufacturers & Commerce site. “Roughly a third of the components we use in our North American plants come from suppliers in China.”
Ramirez added that “right now we have an incentive not to manufacture products in the US that require Chinese supplied content. If these tariffs stay in place for a long time, we’ll see jobs move outside the US to non-Chinese countries.” Japanese and European suppliers, he said, could grab business away from American companies such as his.