What are the global effects of the automotive industry due to the covid shutdowns in China?

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The interview conducted by Global Autoindustry.com with Mr. Bill Yang highlights the important factors of the automotive industry and the effects due to COVID shutdown. Mr. Quan Bill Yang is an Associate in Butzel Long’s Detroit office. He is responsible for the Asian markets and clients. He is focused on commercial litigation support, international merger and acquisition, regulatory compliance, and transactional negotiations. The audio version has been edited as per the need of the content.

How are China’s COVID lockdown threatening to disrupt the automotive supply chain around the world?

Since the emergence of the virus, China generally has stepped up to a Zero tolerance approach. We seek testing travel restrictions along with widespread lockdown in several major cities in China, like the Republic of Wuhan, Xi an, Shenzhen, Shanghai, Hangzhou, and Beijing now.

The latest wave in Shanghai, started in early  March, closing factories of companies including several OEMs in the city or nearby. Much of the rest of the world has adopted the strategy of minimizing COVID infections and managing surges while avoiding severe disruption of business and daily life but China is still stuck with a Zero tolerance policy.

Given China’s role as a key supplier out to the world typically in the automotive industry, as well as Shanghai Manufacturing and shipping hub for import and export of products from China. The lockdown has severely disrupted the supply chain of the Global Automotive industry.

The uncertainty that comes with China’s COVID policies makes it difficult to predict now how the Shanghai shutdown will play out. Supply chain relocation out of China may accelerate unless there is a timely relaxation of the Zero tolerance policy. Even if the Lockdown lifts soon, the ripple effects may be felt for months. As many of the cargo ships currently waiting outside shanghai will make their way to the USA where we still have the congestion and of course long Beach or any other west coast, east coast ports in the USA.

Have you seen any new trends in the automotive supply agreements in order to prevent any further disruptions from China?

Yes, we do. In reviewing several new supply agreements and as we saw, several work letters suppliers received from the US OEMs and tier 1. A prerequisite term that is more frequently used is USMCA products so, which means, suppliers have to manufacture these parts in either US or Canada and Mexico.

So, former President Donald Trump’s trade work may have been pushing more manufacturers and other businesses to leave China. However, a trend of multinational companies with a presence in China moving to South Asia and Mexico began even earlier than that. When the cost of doing business in China began to rise.

So, a more recent trend is that USA-based and China-based companies are trying to relocate their manufacturing factory facility from China to Mexico or South Asia. Mexico is a hot spot. It is difficult to qualify how many Chinese-based companies in the automotive supply chain have moved to Mexico but personally, I have already assisted over dozen of them and the number is increasing exponentially so far.

Can you name a couple of typical mistakes or misunderstandings that suppliers have before relocating to other countries?

Yes, based on the cases, I have handled. I think intellectual property is one of the major questions. Because China companies when are manufacturing in China. They are not in the jurisdiction of the US or USMCA conference or they can enforce the US orders in such restrictions. And now when they relocate to the USMCA jurisdiction, based on the treaty between Mexico, Mexico, and Canada. All the manufacturers in Mexico, in USMCA regions, have to follow the protection matters, and rules of the intellectual property in such jurisdiction as much as they were in the  US.

And also one of the tough questions I was asked is the rule of the country of origin. There is a separate chapter for the USMCA treaty and a whole panic schedule on how to apply such rules to automotive products, some suppliers take it for granted that, if the products are satisfied making Mexico’s labeling requirements, the products meet the requirement of USMCA. But this is wrong.

USMCA had its own rules regarding the country of origin and each category of products. Either it is assembled or manufactured in the region. Also, we cannot ignore the anti-dumping and counter the prevailing investigation of certain materials, and parts, which have special calculations, equations, or metrics for this product to satisfy the US import policy. So these are special, we have to calculate case by case.

Can Chinese suppliers avoid the 301 tariffs by relocating to Mexico?

Yes, partly they can. 301 tariffs do anything produced in China but when they are processed in Mexico or assembled in Mexico. They have to fit in certain calculations and metrics to convince the US customs to recognize them as a product made in USMCA as I said, we have to technically depend on each of the pieces of the products, and feed it into the category in the USMCA chapter and for the appendix.

And one more question found this is the Chinese companies who relocate in Mexico, they also have to consider about VAT which one day export to the US directly they don’t have to pay. But in Mexico, as Mexico is a VAT jurisdiction, we have to calculate in addition to the base, value base price of the product, the goods.

What are the general steps for Chinese suppliers to move manufacturing to Mexico?

Based on my clients’ experience, when the Chinese companies relocate to Mexico, they have to get approval from the Chinese government for overseas direct investment. They call it ODI approval. So, this is the first step and the trend is occurring at the same time as labor cost in China exceeds labor cost in Mexico. So, they have done the calculation of the cost and the breakdown of the cost first before they relocate, and general manufacturing companies, have to find a good location, cause Mexico is a pretty big country as well.

A different province with different policies and they can talk to the local government for incentives and purchase well commercial property in lease. And also, we help the client to coordinate with local bankers to open a bank account. But in Mexico, it is unbelievable, that it takes two months to open a commercial bank account. So, if an investor trying to open a new business in Mexico, it is better to start early. Because the tax id and the bank account take a long. Also, we have already seen the import and export qualification in Mexico might take over 2 or 3 months. Because the customs need to examine or inspect onsite and the appointment generally takes over 1 month to set an appointment and it takes another 1 or 2 months to get an approval. These are the major issues, some new investors relocate needs their facilities from China to the USMCA region to Mexico.

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