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

SHANGHAI, Sept 5 (Reuters) – As Shanghai was hit by a heat wave in June, the car factory where Mike Chen works shifted production to night shifts and turned down air conditioning.

For Chen, who toiled through the early hours of the morning in his sweat-soaked military uniform, it was the latest slap in the face after bonus and overtime cuts 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 in a joint venture between Chinese state-owned auto giant SAIC (600104.SS) and Germany’s Volkswagen (VOWG_p.DE), is far from alone. Millions of auto workers and 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 feel angry and sad.”

The price war sparked by Tesla Inc (TSLA.O) has snapped up more than 40 brands, shifting demand away from older models and forcing some automakers to limit production of both electric cars and combustion-engined cars, or close factories altogether.

Reuters interviews with 10 executives of automakers and auto parts suppliers, as well as seven factory workers, suggest that the broader industry is in distress, with severe pressure on everything from components to electricity bills to wages – which in turn is affecting spending. In other places in the world. Economy.

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

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

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

In the first seven months of 2023, China sold 11.4 million cars at home and exported 2 million cars, 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 China Center at Oxford University, adding that insufficient attention to demand ultimately leads to excess inventories, lower prices and financial pressures.

“China has to really 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. Since then, CEO Elon Musk has doubled down on his strategy, announcing further cuts last month.

Including plants that make combustion-engined cars, China had capacity to produce 43 million vehicles a year 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 shows ( CPCA). .

Meanwhile, wage cuts and layoffs in the auto industry and its suppliers — which employs an estimated 30 million people according to Chinese state media — are impacting living standards at a time when Beijing is desperate 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 was able to reduce Mike Chen’s pay by reducing hours and cutting bonuses, without manipulating his base pay, which typically covers up to half of the compensation workers 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 reached 11,300 yuan in June, according to government data.

A Reuters analysis of estimated income included in recent job ads 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) at the high end.

Auto worker Liu, 35, said he left the Changan Automobile Plant (000625.SZ) in Hefei in July after receiving 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 that he would quickly find another job in the automotive field, but the market had shifted.

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

Changan Automobile Company said that working hours and wages vary from one worker to another.

Several automakers including Mitsubishi Motors (7211.T) and Toyota (7203.T) laid off thousands in China after sales slumped. Other companies 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 being rejected by Li Auto and Xpeng, Liu almost got a job at a Chery factory in the eastern port of Qingdao through a labor agent, but refused to pay him a commission of 32,000 yuan to secure the job.

“Some factories drain you and want to pay you more. Some factories drain you, but they are stingy. Some factories don’t drain you, but they starve you because the salaries are too low,” Liu said.

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

Cut through the chaos

It has been a similarly harsh environment for auto suppliers in China as car prices continue to fall, 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.

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

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

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

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 state-owned Changan Automobile to retract 10% price cuts.

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

RealLi Research data showed that lithium iron phosphate (LFP) batteries, the type used by Tesla in China, were 21% cheaper in August than 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 slicing knife with a message engraved on its sheath: “Cutting the mess decisively.”

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

“They kept me up at night.”

($1 = 7.2951 Chinese yuan)

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