Holding back the tide
In the tale of King Canute (King of England, Denmark and Norway in the eleventh century interestingly) he set up his throne on the beach in the face of the incoming tide in order to demonstrate that even Kings had limits to their powers. However much he was respected by his courtiers and subjects, he could not hold back the tide, so he did get his feet wet. We face a different tide now in the shape of the Chinese car manufacturers, a topic that is perhaps second only to agency in discussions that I have with car dealers in Europe. Will Chinese brands replace the brands that we are familiar with? Which ones should they be speaking to? Will the EU and national governments impose some form of sanctions or restrictions? The fact that these questions combine both some sense of fear and interest underlines the fact that the entry of Chinese brands into Europe and other export markets is both a threat and an opportunity.
The topic has seized the headlines again this week as Carlos Tavares, the Stellantis CEO, in an interview in Le Figaro, has accused the EU of “rolling out the red carpet to the Chinese” through legislating for electric cars from 2035, the area where the Chinese have a competitive advantage. In the past he has complained about the “unequal treatment” of Chinese manufacturers in Europe, compared to the environment for foreign brands in China, leading up to Stellantis having to file for bankruptcy in China with respect to their Jeep JV with Guangzhou Auto at the end of last year. He does not however advocate special tariffs on Chinese car imports, rather more support for the auto industry in Europe to increase local sourcing and bring down the cost of batteries, and has rejected on cost grounds a call from the French Government to shift production of the e-208 from Spain to France.
Many people inside and outside the auto industry are interested in what the growth of the Chinese manufacturers means for the manufacturing sector and the brands that we are familiar with today. ACEA, the manufacturers’ trade association in Europe, estimates that 13 million jobs in the region are directly or indirectly related to the automotive sector, representing around 7% of all employment. Even if only 10% of those jobs were lost to Chinese imports (recognising that for logistical reasons if no other, the Chinese OEMs will start assembly in Europe at some point, as the Japanese and Koreans did before them), that is still over a million jobs, and 1% increase in the unemployment rate. That blow would not fall evenly, as the capacity cuts would be focused on specific plants affecting those areas very heavily.
Although I have spent most of my career working in the auto industry, in the past I also spent some time consulting to the clothing industry – I think more to do with my operations expertise, rather than my dress sense. Although the industrial revolution in the UK was founded on the cotton industry and a strong clothing manufacturing industry developed on the back of it, that era had long gone by the 1990s. Fabrics for things like shirts were sourced in either China for basics, or Japan for premium products, and the finished clothing was then cut, sewn and finished in the UK. The extended supply chain and relatively high labour costs eventually killed the industry in the face of lower cost competition from the Far East. Today, the sites that previously employed hundreds of people in manufacturing house warehouses that distribute products sourced thousands of miles away, even if they still carry the same brand labels that they used to. Only top end premium products are still manufactured here, serving a tiny market niche where price is almost immaterial.
I do not want to suggest that there is an exact parallel between the clothing industry and the auto industry, but you could compare the shirt fabric with the BEV battery, and the different product segments in clothing with the brand positioning of the car companies. If we are unable to supply key components locally, we are actually reinforcing overseas competitors, and once started down that slippery slope, first you lose the value brands, then the normal premium brands, and ultimately are only left with the couture sector.
Like Tavares, I am not a supporter of tariffs and erecting artificial defences to the Chinese entrants. Competition is good, and it ensures that nobody gets lazy. I recently drove the Dacia Spring (manufactured in China by Dongfeng) and it seemed a good quality product for an urban dweller who is not worried about taking it round a race circuit. However, I do believe that EU or government support should be extended to the industry now in order to help them accelerate their transition to a 100% BEV product base at prices that are affordable to the many rather than the few. The 2035 zero emissions deadline has been set by the EU without regard to the consequences, and they are now digging their heels in on the call for a delay to the imposition of tariffs related to local content which will affect BEVs being sold in the UK by European-based OEMs, and vice versa.
If they do not take measures now to help the industry with a fundamental transition, they will instead end up funding regeneration schemes and retraining in the areas where car plants have closed. A little bit like the used car business, the first intervention is the best intervention, delaying will cost more, and have much broader societal impact than making the right decisions now. We can’t hold back the tide, but we can build stronger defences.