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

SHANGHAI — As Shanghai suffered a heatwave in June, the car factory where Mike Chen works shifted production to night shifts and reduced air conditioning.

For Chen, who worked hard until dawn in his sweat-soaked uniform, it was the latest slap in the face after bonus cuts and overtime reduced his monthly salary this year to just over $100. a third of what he was earning when he was hired in 2007. 2016.

Chen, 32, who works for a joint venture between Chinese car giant SAIC and German Volkswagen, is far from alone. Millions of workers and auto suppliers in China are feeling the pressure as an electric vehicle price war forces automakers to cut costs wherever they can.

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

The price war sparked by Tesla has drawn in more than 40 brands, diverted demand from older models and forced some automakers to cut production of electric vehicles and combustion-engine cars, or close factories altogether.

Interviews with Reuters with 10 executives of automakers and auto parts suppliers, as well as seven factory workers, point to a broader industry in trouble, with savings on everything from components to electricity bills in through wages – which in turn weighs on spending elsewhere in the world. economy.

Asked about the SAIC-VW plant where Chen works, which makes combustion-engine cars, VW said wages at the joint ventures vary depending on working hours and bonuses. He said building cars at night eased the load on power grids and good and healthy working conditions were a top priority. SAIC did not respond.

Economists warn that China’s auto sector could even become a drag on economic growth due to the fallout from the price war, which would be a sharp turnaround for an auto industry that is by far the largest in the world.

The problem is that, despite huge investment in production capacity, aided by large government subsidies, domestic demand for cars has stagnated and household incomes remain under pressure, economists say.

In the first seven months of 2023, China sold 11.4 million cars domestically 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, a research associate at the China Center at the University of Oxford, adding that insufficient attention to demand ultimately leads to surpluses of inventories, price declines and financial stress.

“China really needs to learn to walk on two legs. »

“The good old days are over”

Chinese factories were already far from operating at full capacity when Tesla first cut prices in October last year and then again in January. CEO Elon Musk has since doubled down on his strategy with further cuts announced last month.

Including factories making combustion-engine cars, China had the capacity to produce 43 million vehicles a year by the end of 2022, but the factory utilization rate was 54.5%, down from 66.6 % in 2017, according to data from the China Passenger Car Association (CPCA). .

At the same time, wage cuts and layoffs in the auto industry and its suppliers – which employ around 30 million people according to Chinese state media – are affecting living standards at a time when Beijing is desperate to raise consumer confidence near record high. the lowest.

Reducing wages is illegal in China, but complex wage structures offer ways around this problem.

SAIC-VW, for example, was able to reduce Mike Chen’s take-home pay by reducing working hours and reducing bonuses, without changing his base salary, which typically covers up to half of what workers expect. when they join the company.

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

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

A Reuters analysis of estimated earnings included in recent job postings from 30 automakers showed hourly wages of between 14 yuan ($1.93) and 31 yuan ($4.27), Tesla, SAIC-GM, Li Auto and Xpeng being at the top of the scale.

Liu, 35, an autoworker, said he left the Changan Automobile factory in Hefei in July after earning 4,000 yuan in May and June, instead of the 7,000 yuan he had hoped for each month. Based on his past experiences, Liu was confident that he would soon find another job in the automotive industry, but the market had transformed.

“The good old days are over,” said Liu, speaking on condition of partial anonymity to protect his job prospects.

Changan Automobile said working hours and wages vary from worker to worker.

Several automakers, including Mitsubishi Motors and Toyota, laid off thousands of people in China after sales plummeted. Others, like Tesla and battery maker CATL, have slowed hiring by delaying expansion. Hyundai and its Chinese partner are trying to sell a factory in Chongqing.

After being rejected by Li Auto and Xpeng, Liu nearly got a job at the Chery factory in the eastern port of Qingdao through a placement agent, but he refused to pay him a 32,000 commission. yuan to get the job.

“Some factories wear you out and are willing to pay you more. Some factories exhaust you, but are miserly. Some factories don’t exhaust you, but starve you because the wages are too low,” Liu said.

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

Eliminate the clutter

The environment was equally brutal for automotive suppliers in China, as car prices continued to fall, with the weighted average transaction price of electric and hybrid vehicles in June down 15% from January, to 185,100 yuan.

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

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

More than half called for reductions of 5 to 10 percent, above the 3 to 5 percent targets of previous years. Nine out of ten companies expected more such requests this year.

Suppliers typically negotiate prices once a year, but many have been pressured to lower prices on a quarterly basis in 2023, two senior auto supplier executives said.

Before launching the price war, 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.

And in June, a group of small suppliers wrote to the state-owned Changan Automobile to oppose a 10% price cut.

The electric vehicle battery market has also changed, with suppliers cutting prices for automakers. CATL, which counts Tesla as its biggest customer, offered discounted battery packs to smaller domestic EV makers in February.

Lithium iron phosphate (LFP) batteries, the type used by Tesla in China, were 21% cheaper in August than five months ago, while nickel-cobalt batteries were 9-18% cheaper, according to data from RealLi Research.

When Chen Yudong, Bosch’s operations manager in China, visited one of his biggest customers in March, he received an unusual gift, a carving knife with a message engraved on its sheath: “Cut so decisively through disorder”.

Three months later, he told Reuters that price cuts had been more aggressive in 2023 than in previous years.

“They keep me up at night.”

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