Insight: China’s auto workers bear the brunt of the price war as the fallout widens

SHANGHAI (September 5) (Reuters) – With Shanghai hit by a heatwave in June, the car factory where Mike Chen works has shifted production to night shifts and lowered its air conditioning.

For Chen, who toiled through the wee hours in his sweaty uniform, it was the latest slap in the face after bonus cuts and overtime work cut his monthly salary this year to just over a third of what he earned when he was hired in 2016.

Chen, 32, who works on a joint venture between Chinese state-owned auto giant SAIC (600104.SS) and Germany’s Volkswagen (VOWG_p.DE), is by no means alone. Millions of auto workers and suppliers in China are feeling the pressure as an electric-vehicle price war forces automakers to cut costs anywhere they can.

“SAIC-VW was the best employer and I felt honored to work here,” Chen said. “Now I feel angry and sad.”

The price war sparked by Tesla Inc. (TSLA.O) has taken out more than 40 brands, shifted demand away from older models and forced some automakers to limit production of both electric and combustion-engined vehicles, or to close factories altogether.

Reuters interviews with 10 executives of automakers and auto-parts suppliers, as well as seven factory workers, suggest the broader industry is in distress, with everything from components to electricity bills to wages under severe pressure — in turn affecting spending. elsewhere in the world. Economy.

Asked about Chen’s SAIC-VW plant, which makes cars with combustion engines, Volkswagen said wages in joint ventures vary based on working hours and bonuses. She said that manufacturing cars at night reduces the burden on the electricity grids, and that healthy and good working conditions are a top priority. SAIC did not respond.

Economists warn that the auto sector in China could become a burden on economic growth due to the repercussions of the price war, which would be a stark shift for the auto industry, which is the largest in the world at all.

The problem is that although there has been huge investment in production capacity, backed by large government subsidies, domestic demand for cars has remained stagnant and household incomes are still under pressure, economists say.

In the first seven months of 2023, China sold 11.4 million cars at home and exported 2 million, but the growth came almost entirely from abroad. Exports jumped 81%, but domestic sales rose only 1.7%, despite widespread price cuts.

“The focus on production and supply is unbalanced,” said George Magnus, research associate at the University of Oxford’s China Centre, adding that insufficient attention to demand eventually leads to excess inventories, price cuts and financial pressures.

“China really has to learn to walk on two legs.”

“Gone are the good old days”

Chinese factories were already far from running at full capacity when Tesla cut prices for the first time in October last year and then again in January. Since then, CEO Elon Musk has doubled down on his strategy, with more cuts announced last month.

Including factories that make cars with combustion engines, China had the capacity to produce 43 million vehicles annually at the end of 2022, but the factory utilization rate was 54.5%, down from 66.6% in 2017, data from the China Passenger Car Association (CAPA) shows. CPCA). .

Meanwhile, wage cuts and layoffs in the auto industry and its suppliers — which employ an estimated 30 million people according to Chinese state media — are weighing on living standards at a time when Beijing desperately wants to lift consumer confidence from a near-record level. lowest levels.

Cutting salaries is illegal in China, but complex pay structures offer ways around this.

For example, SAIC-VW managed to lower Mike Chen’s pay by reducing working hours and cutting bonuses, without tampering with his base wage, which usually covers up to half of the compensation workers can expect when they join.

BYD (002594.SZ), China’s largest electric vehicle maker, advertised a job in August at its Shenzhen factory with an estimated monthly income of 5,000 to 7,000 yuan, but the base salary was 2,360 yuan ($324).

The average monthly wage in China was 11,300 yuan in June, according to government data.

A Reuters analysis of the estimated income included in recent job advertisements from 30 auto companies showed hourly salaries ranging from 14 yuan ($1.93) to 31 yuan ($4.27), with Tesla, SAIC-GM, Li Auto (2015.HK) and Xpeng (9868) . .HK) is at the top end.

Auto worker Liu, 35, said he left Changan Automobile Factory (000625.SZ) in Hefei in July after earning 4,000 yuan in May and June, instead of the 7,000 yuan he had expected each month. Based on his past experiences, Liu was confident he would quickly find another job in the automotive field, but the market had shifted.

“The old days are over,” said Liu, who spoke on condition of anonymity in part to protect his chances of getting a job.

Changan Motors said working hours and wages differ from one worker to another.

Several automakers including Mitsubishi Motors (7211.T) and Toyota (7203.T) have laid off thousands in China after declining sales. Others such as Tesla and battery maker CATL (300750.SZ) slowed hiring due to delayed expansions. Meanwhile, Hyundai (005380.KS) and its Chinese partner are trying to sell a factory in Chongqing.

After Li Auto and Xpeng turned him down, Liu almost got a job at Chery’s factory in the eastern port of Qingdao through a labor agent, but he refused to pay him a commission of 32,000 yuan to secure the job.

“Some factories drain you and are willing to pay you more. Some factories drain you, but they are stingy. Some factories do not drain you, but starve you because the salaries are so low,” Liu said.

“Maybe I’d be better off as a security guy in some office building.”

Cut through the chaos

It was a similarly harsh environment for auto suppliers in China as car prices continued to decline, with the weighted average transaction price of electric and hybrid vehicles in June down 15% from January at 185,100 yuan.

For example, SAIC-VW offered more than half a billion dollars in cash support to car buyers in March and a rebate of just over $5,100 on its ID.3 electric hatchback for a period in July.

The state-run China Automotive News estimates that there are more than 100,000 auto suppliers in the country. In a survey of nearly 2,000 people conducted by auto parts trading platform Gasgoo in March, 74% said automakers had asked them to cut costs.

More than half were asked to make cuts of 5-10%, higher than previous years’ targets of 3-5%. Nine out of 10 companies expect more such orders this year.

Two senior executives at auto suppliers said suppliers usually negotiate prices once a year, but many have been pressured to lower prices on a quarterly basis in 2023.

Before the price war began, Tesla sent emails to its direct suppliers, encouraging them to cut costs by 10% this year, according to a person with direct knowledge of the matter.

In June, a group of small suppliers wrote to the state-owned Changan Automobile Company to retract 10% price cuts.

The market for electric vehicle batteries has also shifted, as suppliers cut prices for automakers. CATL, which counts Tesla as its biggest customer, offered smaller domestic electric car makers discounted batteries in February.

RealLi Research data showed that lithium iron phosphate (LFP) batteries, the type Tesla uses in China, were 21% cheaper in August than they were five months earlier, while nickel-cobalt batteries were 9% to 18% cheaper.

When Chen Yudong, the head of Bosch’s China operations, visited one of his biggest clients in March, he received an unusual gift: a chopping knife with the message engraved on its sheath: “Cut the clutter decisively.”

Three months later, he told Reuters the price cuts were more aggressive in 2023 than in previous years.

“They kept me up at night.”

($1 = 7.2951 CNY)

Our standards: Principles of Trust for Thomson Reuters.