Since the first round of the new China tariffs became effective, automotive suppliers have been scrambling to determine bottom lines, apply for exemptions, look for ways to mitigate exposure, renegotiate contracts and investigate fundamental restructuring.
In reaction to the trade war, Chinese suppliers without a U.S. footprint are generally looking to relocate their production lines to Mexico and Southeast Asia.
Even before the Trump-imposed tariffs took effect, many Chinese suppliers were already evaluating their options to move certain low-skilled factory work out of China to avoid increasing Chinese labor costs.
The tariffs have served to accelerate this process.
Many suppliers reacted quickly by undertaking studies to assess where they could move production to best mitigate the impact of tariffs. The findings are clear: Labor costs in the U.S. are on average four times higher than in Mexico and many Southeast Asian countries.
Until Chinese suppliers can substantially lower their labor costs by using advanced manufacturing techniques, it makes more sense to move production to those sites.
Chinese suppliers that are considering moving production to the U.S. or expanding existing plants in the U.S. face difficulty in filling jobs due to the historically low unemployment rate and the lack of skilled blue-collar workers.
From the U.S. perspective, small and medium-size U.S. suppliers that depend on imports from China will likely have no choice but to cut staff to survive the trade war.
While some higher-tier suppliers that have achieved a global footprint and domestic production will have little difficulty enduring the trade war, increased costs resulting from the tariffs will place a significant and harmful burden on small and medium-size lower-tier suppliers.
Where U.S. suppliers are unable to absorb the higher costs or pass the costs on to the consumer, their only options will be to institute layoffs, move overseas or close plants.