When Donald Trump became president, redesigning the automotive industry’s global supply chain was near the top of his ‘to do’ list.
Almost two years since he was sworn in, that ambition is being realised – although not in the way that Trump had envisaged.
The most dramatic evidence that things weren’t going to plan was General Motors’ announcement last November that it plans to shut five manufacturing facilities in North America, cut up to 15,000 jobs and discontinue six models. Only weeks before that, Ford disclosed an $11bn restructuring which will include an unspecified number of job losses.
Trump was not amused, telling the Wall Street Journal: “I think GM ought to stop making cars in China and make them here. I think they forgot where they came from.” Elon Musk’s Tesla is trying to do what Trump wants the country’s automotive companies to do – make them in America and export them to China – but has been caught in the crossfire of the trade war.
After China retaliated against US tariffs, by slapping a 40% import duty on American cars, Tesla reduced prices by 12-26% to stay competitive but sales are still believed to be down. Mindful of the uncertain outlook on tariffs, Musk’s company has bought a $140m site near Shanghai where it plans to start manufacturing in two years time. By then, Tesla may have competition in its own backyard as Chinese luxury sports car maker Qianto is planning to open a factory in California in partnership with local start-up Mullen Technologies.
One analyst blamed all this industry mayhem on the “whimsical imposition of tariffs” yet the economic case for making cars as close to customers as possible was compelling before Trump took office. As Robin Zhu, a senior analyst at Sanford C. Bernstein, told the Wall Street Journal: “Even if the tariff was zero, GM wouldn’t build its China volumes in the US. The supply chain would be too long and logistics costs would make the cars structurally unprofitable.”
Profit margins on new cars are shrinking for many reasons – Dieselgate, fierce competition, production capacity and the rise of online comparison platforms like Carwow.co.uk being merely the most obvious. The industry consensus is that only low-volume high-end vehicles can be profitably exported.
One glance at global car sales is enough to illustrate why the automotive supply chain is being reconfigured. In 2017, China bought 25.8m cars or light commercial vehicles, compared to 17.2m in the US. The Asia Pacific region now accounts for 47% of global demand. The balance of trade is even starker if you focus on GM. In the third quarter of 2018, it sold 835,934 vehicles in China (compared to 694,638 in the US) and made a $2bn profit there.
While all this is going on, every automotive manufacturer is grappling with two technological revolutions at once – electric vehicles and autonomous vehicles – while keeping a nervous watch on Apple and Google. “The manufacturers fear that they will become the Foxconn of the autonomous vehicle industry,” says one British automotive analyst. “They worry that all the value will go to Apple and Google (through its spin off Waymo) and they’ll end up effectively as component manufacturers.”
Mary Barra, GM’s CEO, says the restructuring is necessary to free up capital, resource and management time to develop electric and self-driving vehicles. Her refocusing of the group is a culture shock for a company that overtook Ford as the largest US automaker in the 1920s with the slogan “A car for every purpose”.
The world’s three largest carmakers – Toyota, VW and Renault-Nissan-Mitsubishi – are expected to make more than 10m vehicles a year. Having sold Opel-Vauxhall last year to French group PSA, GM is expected to make less than 9m. That number will fall again in 2019.
Barra’s rationale has not impressed many American politicians but the progress of its autonomous vehicles programme does indicate how capital intensive the automotive industry has become. Two years ago, GM paid $1bn for self-driving start-up Cruise Automation. Since then, Cruise has attracted a $750m investment from Honda (with $2bn more promised) and $2.25bn from Japan’s big tech fund Softbank (which will own 20% of GM Cruise).
Will Barra’s gamble pay off? That depends on how soon, how profitably and on what scale GM can launch its electric and self-driving vehicles. The latter represent more of a challenge as there are concerns – over how smart the technology is, how hack proof it will be and how realistic the industry timeline for its introduction is.
The easing of tariffs might give GM some breathing space. (China’s import duty on American-made cars fell to 15% on 1 January, as part of a three-month truce to resolve their differences.) Trump may be inclined to negotiate. He is beginning to discover that, as the political philosopher Niccoló Machiavelli wrote: “Any man can start a war at his pleasure, but cannot at his pleasure bring it to a close.”
☛ Want to stay up to date with the news? Sign up to our daily bulletin.