Resilient supply chains: the strategies of automotive suppliers in times of global trade conflict

The latest increase in import duties, including on electric vehicles imported by China to the USA, is currently causing tension in international trade relations. In this situation, the automotive industry is searching for opportunities to increase the resilience of its supply chains.

As recently announced by U.S. President Biden, the import duties on Chinese electric vehicles in the USA were increased in May 2024 from 25% to 100%. This measure forms part of a broader strategy to protect American workers and domestic production. More specifically, the USA is reproaching China for flooding the global market with cheap, state-subsidized exports. A further escalation of the trade conflict in which both countries are increasingly toughening their customs barriers and introducing additional trade restrictions, can no longer be avoided. Not only will such developments put a strain on bilateral trade relations, they will also negatively affect global supply chains and markets. There is also the risk that other countries will be drawn into the conflict, particularly if they have to take a stand and choose between the two economic powers. Further obstacles to international trade in goods are not unlikely either in this situation.

This raises a number of crucial questions for the automotive industry as a highly networked global industry sector: How serious is the current situation? What further reactions and consequences are to be expected? How are automotive suppliers responding to the situation in order to ensure reliable supply chains?

How are the Chinese automotive industry and government reacting to the increase in U.S. import duties on electronic vehicles?

The growing interest and increasing acceptance of electric vehicles among U.S. consumers are becoming increasingly strong. In recent years, the market share of electric vehicles in the USA has increased from 1.4% in 2019 to 7.3% in the first quarter of 2024, and further significant increases are expected.

The electric vehicle industry is of considerable strategic importance to the future of the U.S. economy. Not only are traditional vehicle manufacturers such as Ford, GM and Stellantis bringing more and more electric vehicles onto the market, but new providers such as Tesla, Rivian or Lucid are also wooing market shares. The latest increase in import duties imposed by the U.S. government is intended to ensure that electric vehicles and their associated batteries are produced in the USA, as far as possible. The aim is to reduce dependency on imports, particularly from China, and to secure the supply chain for critical technologies.

Following fierce criticism of these measures, concrete responses by the Chinese are to be expected. The most obvious of these is firstly the lodging of a complaint with the World Trade Organization (WTO) for violation of international trade rules. In addition, retaliatory tariffs could be imposed on U.S. products to put pressure on the USA.

A further possible reaction of the Chinese automotive industry could be to focus more on other markets such as Europe, Southeast Asia and Latin America. These regions offer excellent growth opportunities in the electronics segment and could compensate for customs-related losses in the U.S. market.

In addition, the relocation of production abroad is one way in which Chinese manufacturers could circumvent the customs duties. For example, an electric car produced in Mexico by a Chinese manufacturer as part of the agreement concluded in 2020 between the USA, Mexico and Canada (USMCA) can currently be brought onto the U.S. market free of customs duty. It is to be expected that Chinese manufacturers will increasingly rely on cooperation and joint ventures with local players to increase their market presence and facilitate access to local production plants and distribution channels. There is increasing demand, in the USA, to take targeted protection measures against this practice.

However, even without such cooperation, many experts can see the Chinese automotive industry establishing itself in the medium and long term even in markets with higher customs duties, particularly in the electric vehicle sector. The ability to invest heavily in innovation and inexpensive production methods plays a key role in this context. Therefore, it is to be expected that Chinese manufacturers will continue offering competitive prices on the U.S. market.

Automotive suppliers reduce their risks in the supply chain

Automotive suppliers follow the strategy of OEMs in securing their supply chains and maintaining their market position. Central measures here include diversifying production sites and localizing production. To circumvent customs duties and trade barriers, the first step is to create local production potential in all the important markets. In addition, many suppliers are moving towards the production of critical components directly on site or procuring them from local suppliers. This reduces supply chain risks, ensures a stable supply of the necessary components and, at the same time, helps optimize production and transport costs.

So, the trend of establishing production capacities nearer to the outlet market will become even more crucial in the future. This approach is not new, but has been evident since the 90s under the catchword “China for China”. In the process, foreign companies are utilizing their production capacities in China primarily to serve the Chinese market rather than stepping up production at these sites for export to other countries. Through the foundation of joint ventures with local, mostly state-owned enterprises (SOE), foreign automotive manufacturers have been able to gain a foothold in China and are successfully participating in what is now the largest automotive market in the world. Examples of this include successful joint ventures between VW and the Chinese OEMs, FAW and SAIC. In the past, these joint ventures focused very strongly on production for the Chinese market. An increasing number of joint ventures for the local development of vehicles is emerging in order to meet the specific requirements of the Chinese automotive market.

In the wake of increasing tensions between China and the USA, Southeast Asia is increasingly developing into an important alternative location for automotive production in Asia in line with a strategy referred to as the “China + 1 strategy”. The aim is to counteract one-sided dependency on China by setting up at least one additional production plant in the region. Numerous countries in Southeast Asia have already begun to capitalize on the tensions by serving as alternative production sites for companies wishing to diversify their supply chains while, at the same time, continuing to operate close to the largest markets in the world. In addition to their strategic locations, these countries offer lower labor costs, a solid infrastructure and favorable trade conditions through economic integration into the ASEAN states. Well-known manufacturers such as Ford, Honda, Toyota and BMW have already set up large production plants in Thailand. Malaysia is known above all for the production of high-end electronics and automotive components, and countries such as Vietnam or Indonesia are positioning themselves with excellent operating conditions to attract investment in the automotive sector. India is experiencing rapidly growing investments by foreign companies such as Apple, and is planning on an economic growth of 6% in forthcoming years. So it’s just a question of time until many other automotive suppliers set up their own production units in the region.

Another region that is benefiting from the trend towards the global diversification of production sites is North Africa. The region is developing into an important location for the vehicle manufacturing and supply industries, as production costs are low and the geographical proximity to Europe facilitates fast and economical logistics. Free trade agreements and investment incentives such as tax benefits and special land grants are attracting foreign investors to the region. Investments in infrastructure and a growing supply of qualified, cheap workers are contributing to the attractiveness of the location, as is the increasing local demand on the African markets.

Substantial investments in modern production methods and automation present another decisive aspect for successful, decentralized, global production networks. The more locations a company has throughout the world, the greater the advantage of a high degree of automation. Plants that are as identical as possible ensure globally uniform quality standards, and adjustments and maintenance can be carried out, e.g. by replacing individual modules, with comparatively little logistics effort.

This requires not only cost efficiency but also a flexible and robust production network and is a decisive key to success in an increasingly competitive and politically insecure global market. 

Diversification, localization and automation at MD ELEKTRONIK 

To reduce the risk, MD ELEKTRONIK is also focusing on a comprehensive safety strategy in the supply chain. To this end, MD is represented with production facilities in all key automotive industry markets. The sites are equipped with state-of-the-art production facilities and automation technology. This enables MD to manufacture almost the entire product portfolio in every region. The use of uniform production facilities means that globally uniform, high quality standards can be maintained.

This diversification and decentralization of production also ensures that supply can continue even in the event of disruptions at a site. The company also adheres to a “local for local” strategy in procurement: where possible, supplier components are procured locally to shorten and stabilize the supply chain. These strategic approaches make it possible for MD to create a robust and resilient supply chain, thus ensuring long-term supply reliability and competitiveness.

Supply chain risks in the automotive industry – key factors for greater stability

The increase in U.S. import duties on Chinese electric vehicles will probably have a severe impact on the automotive industry’s global trade relations and supply chains. To meet these challenges, automotive suppliers are focusing on diversifying their production sites and localizing production in the hope that this will prevent trade barriers and minimize supply chain risks. Automation and the use of the latest production methods play a central role in ensuring global quality standards and increasing the flexibility of production networks. At MD ELEKTRONIK, these same principles and a global footprint help to make supply chains robust and resilient. Not only will this strengthen competitiveness, it will also enable long-term supply reliability in an increasingly uncertain global market.

Do you have questions about this topic, or would you like to learn more about our products? Contact MD now to find out more about the supply chains and delivery capacities for our products.
Our team will be glad to advise you!

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About Wolfgang Reitsamer

Wolfgang Reitsamer is Global Vice President of Sales International at MD. His role is to acquire new customers for MD and to continuously expand business with them. Over the past 6 years, he has created the organizational and technical conditions to ensure this, especially in cooperation with his colleagues in North America and Asia. He has over 20 years of sales experience, including 14 in the automotive industry. In addition to close contact with international customers and working in a global team, it is his main task that inspires him every day to continue to strategically and operationally expand MD’s customer base.