Why no one knows the source of every car part — and why it matters
Brutal realisation should be heeded by politicians seeking a rash of trade deals
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.
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.