China parts flow briskly to U.S., but will it last?
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Fast-rising labor wages have shaken China's claim as the world's lowest-cost auto parts producer, but it's unclear whether this means the flow of Chinese parts to the United States will slow.
Last year, U.S. imports of China-made parts jumped 23 percent to $11.8 billion, according to an estimate by the U.S. International Trade Commission.
The labor-backed Alliance for American Manufacturers warns that imported Chinese parts will swamp the U.S. market unless the Obama administration enacts sanctions.
But it's unclear whether the flow of Chinese parts to the United States will continue to grow unchecked, given China's fast-rising labor costs.
If Chinese imports do slow, industry executives say, the likely beneficiaries are factories in other low-cost countries such as Mexico and Vietnam - not the United States.
Given the issue's political sensitivities, the Detroit 3 and their Tier 1 suppliers are reluctant to discuss their strategies to import inexpensive parts from China and other low-cost countries.
Industry insiders say the Detroit 3, Tier 1 suppliers and aftermarket distributors typically import Chinese components that require lots of labor, but little engineering. And the parts must be easy to ship, such as radios or instrument clusters.
A snapshot of current U.S. imports from China is available in a report by Stewart and Stewart, a Washington, D.C., law firm that has done trade research for the alliance.
According to the report, common imports include engine ignition coils, brake linings, glass windshields, radiators and aluminum wheels. The United States also was a big importer of Chinese tires - at least until the Obama administration imposed a tariff in 2009.
The report argues that Chinese suppliers benefit from an artificially cheap currency plus government subsidies for fuel and other costs -- subsidies that totaled $8.7 billion in 2010, according to one estimate.
"China has a huge war chest, and they've teed up the auto parts sector to become dominant players," said Terence Stewart, managing partner of the law firm.
| U.S. auto parts imports from China, for original equipment and aftermarket | |
| 2011 | $11.79 billion |
| 2010 | $9.57 billion |
| 2009 | $7.06 billion |
| 2008 | $8.41 billion |
| 2007 | $8.04 billion |
China's rising wages
But there are signs that China's price advantage is starting to erode.
Factory wages in China's coastal provinces began to rise significantly two years ago, after wildcat strikes in a transmission plant in Guangdong province led Honda to grant a 32 percent pay increase, raising monthly base wages to 2,532 yuan ($391).
To maintain labor peace, other suppliers also raised pay. Monthly compensation remains low by Western standards, typically ranging from $320 to $400, according to industry analysts.
But factory wages are rising about 20 percent a year, and a few international suppliers have moved production to other countries such as Vietnam, Indonesia and Bangladesh.
The wage issue is especially important for companies that make parts with a high labor content. For example, labor accounts for as much as 50 percent of the cost of a wire harness, says Dieter Ehrmanntraut, CEO of Yazaki North America Inc.
Yazaki has extensive operations in China, and it ships instrument clusters from its Chinese factories to North America.
But the company also has plants in the Philippines, Indonesia, Thailand and Vietnam, and Ehrmanntraut says China no longer is the industry's cost leader. "There is not one particular region which is dominant," Ehrmanntraut said. "It depends on transportation costs."
Production shifts
Rising production costs in China might trigger some production shifts to Southeast Asia or Mexico. But it won't necessarily mean more business for U.S. factories.
For example, Yazaki produces wire harnesses in Mexico and Nicaragua, and it makes prototype harnesses in Michigan. But Yazaki doesn't mass-produce wire harnesses in the United States because wages are too high.
"If I provide a price quote to our customers for a U.S. plant, I would be fairly uncompetitive," Ehrmanntraut said. "That's just the way it is, and that's true for Western Europe, too."
Jack Perkowski, former managing partner of diesel parts supplier ASIMCO Technologies Ltd. in Beijing, agreed that higher wages are driving up costs in China. Suppliers are responding by boosting technology, quality and productivity.
Perkowski expects Chinese parts exports to the United States will remain robust. Tier 1 suppliers will continue to buy China-made subcomponents such as castings and rubber parts, while automakers buy radios and other electronic products.
Perkowski downplays the importance of subsidies, and he does not believe the Chinese government is orchestrating a takeover of the U.S. parts industry.
But he fears trade tensions could worsen. "This year is going to be tough for Sino-U.S. relations," he said. "Everybody wants to beat up China."
You can reach David Sedgwick at dsedgwick@crain.com.
