Companies nowadays are facing intense uncertainty about the effect that international trade tariffs might have on imports, exports, and the global supply chains. Currently, due to the Corona Virus pandemic, many sectors are suffering the consequences of an unpredictable outcome. The reason why this paper aims to develop an explanation on how businesses are being affected by the “trade war” so that we can have an overall perception of the situation that will then provide us with an understanding on the impact raising tariffs have in the car manufacturers sector, in concrete, the Chinese carmaker company SAIC will be studied. The company´s supply chain will be examined as well as the negative effects of raising tariffs, finally we will have a suggestion of what could be done to mitigate the issue.
SAIC motor is the largest Chinese automaker with total equity of 11.683 billion shares. The company covers the research, production, sales and it is actively promoting the commercialization of new energy vehicles. “SAIC Motor is also engaged in the R & D, production and sales of auto parts; auto-related services such as logistics, e-commerce, mobility and new energy service; auto-related finance, insurance and investment; overseas business and international trade; and big data and artificial intelligence.” (SAIC, 2020). In 2018 SAIC accounted for 24%of the Chinese market with annual sales of 7 million. SAIC aims to build an innovative, globally recognized company that pioneers the automotive future. The core values of the company include integrity, innovation, responsibility, and collaboration
According to the World Trade Organization (WTO), the COVID-19 pandemic represents an extraordinary disruption to the global economy and world trade, as production and consumption are scaled back across the globe. Before deepening into the company SAIC, we first need to understand the effects of raising tariffs on “international businesses”.
International trade increases the number of goods consumers can choose from while having lower costs due to increased competition and allowing businesses to ship products to other countries thus increasing the level of economic output and income of a country. Due to this, governments tend to arrange bilateral agreements with other countries to reduce tariffs and barriers to businesses. In any case, governments’ trade policies can make it harder or easier to trade across borders. For instance, under Trump’s administration, the imposition of tariffs, along with retaliatory actions taken by their trading partners, will reduce economic output, income, and employment. According to the Tax Foundation model, the tariffs imposed so far by the Trump administration would reduce long-run GDP by 0.23 percent ($58.02 billion) and wages by 0.15 percent and eliminate 179,800 full-time equivalent jobs. (Tax Foundation, 2020) The effect of raising tariffs is that it will imply higher prices for consumers and also less quantity available which reduces the income leading to lower employment and therefor lower economic outcomes. Moreover, in order to reduce production and consumption distortions created by tariffs. Countries have been allowed to shift towards non-tariff barriers by the World Trade Organization (WTO).
At the moment, due to the pandemic, the global economy is continuously changing, we would have never thought that oil wouldn’t be as important in a society without consumption as a mask or gloves for prevention. On the 14th of February this year, the tax foundation announced that the US was reducing tariffs on $120 billion of Chinese goods by half to 7.5% and China reduces tariffs on approximately $75 billion of US goods in half from 10% and 5% to 5% and 2.5%” according to the statement on the Ministry of Finance website, the movie was made in order to “advance the healthy and stable development of China-U.S. trade.” In other words, to move towards phase one in their bilateral relationship. There is no evidence that this is related to the Coronavirus outbreak, however, the US Department of Agriculture Secretary Sonny Perdue said that the United States should be “understanding” if China did not meet its commitments due to the economic impact of the COVID-19 epidemic in China. (Dr. S. Suppan, 2020).
Although the tariffs have been lowered in the last month, prior to February 2020, tariffs were substantially increased and even after the agreement, tariffs are much higher than they were in 2018.
In order to examine how these changes are affecting the car manufacture sector, the existing supply chains of the Shanghai-based company SAIC Motor Corp. Ltd. will need to be examined as well as the effects the changes have on the business and what can be done to mitigate the problem.
The key element to ensure the success of a business in this globalized world is having an effective supply chain. In May 2019, the US raised imports tariffs to 25% in 200 billion of Chinese goods such as microprocessors, car parts, and machinery (Wall street journal, 2019). For SAIC Motor this supposed a great obstacle towards achieving their organizational goals. This can be observed in the following quote from the South China morning post; “Trump´s trade war tariffs will thwart Chinese carmakers´ dreams of breaking America”. Despite China being by far the world’s largest auto market, producing about 29 million vehicles in 2017, up 3 percent from a year earlier, the tariffs imposed by Trump are making it difficult for the Chinese carmakers to gain market share and increase exports. Although the Chinese auto market is continuing to decline, SAIC Motor is striving to consolidate its market share while paying close attention to the changing trends in the global auto industry” (SAIC Motor, 2019). Furthermore, the company aims to triple overseas sales by 2025, the reason why it joint ventures with Volkswagen and General Motors, which makes up a quarter of China´s automobile market, the world´s largest (Reuters, 2019).
SAIC Motor. Corp Ltd. Is a state-owned company headquartered in Shanghai, SAIC engages with the process of developing, manufacturing and sale of the automobile and related parts. The company has numerous facilities for production in china including sites in at least six cities, it also has an assembly plant in the United Kingdom, India, and Thailand.
Some experts agree on the fact that when tariffs increase, businesses can either absorb the higher cost, increase the prices in order to pass it on to consumers or rearrange the supply chain so as to avoid the high tariffs. In order to suggest a solution for SAIC Motor, these three options will be explained to later see what option is the best for SAIC.
Higher tariffs normally make customers have higher prices that sometimes they are not willing to pay, in order to avoid losing customers and maintain market share, a company can pay for that extra costs or split it up with the suppliers so that the increase in tariffs don´t affect customers directly, a disadvantage of this are lower profit margins for the company as there would be a lower number of sales. This could also affect the evolution of the company as they need to make investments to innovate and acquire more market share. The second option, of course, is increasing prices so that customers pay for that extra cost due to higher tariffs but as mentioned before SAIC would probably sell less quantity and make loose parts of the market that could switch to substitutes. Finally, SAIC Motor could rearrange the supply change by rerouting products and having different locations involved in the supply chain so as to depend less on China and also avoid certain borders. It is to say, if the assembly plant in London was the last step in the production process, shipping the products from there to the US would avoid the huge tariffs imposed on Chinese products. This would be the best option for SAIC as they already have multiple locations outside China. Nevertheless, this is a big action for a company and generally, it involves a high investment to change the supply chain which could seem risky for the company in this time of uncertainty.
Raising tariffs does not only slow down economic growth, “but this also extends a period of uncertainty, which makes it difficult for automakers to make investments and business decisions when you don’t know what the rules of the game are going to be,” said Dziczek.
,We can recall that many international businesses are being affected negatively by the ongoing “trade war” between China and the United States of America due to the fact that they are two very powerful economies and they are taking international businesses to critical positions. The Automotive sector, in general, is suffering from the rise of tariffs, specially Saic because most of the production plants of the company are China, nevertheless, they have other locations which they could use in order to avoid such tariffs, however, since it is a state-owned company it will never stop having the operation in the country because it supposes the loss of many jobs that benefit the economic growth of the country.
Overall, raising tariffs affect all stakeholders of any international company, consumers might have higher prices, the company would have higher costs to enter the foreign market which leads to lower sales, suppliers would also have lower profit margins and many employees could lose their job positions if the company decided to rearrange the supply change in order to have more strategic locations to avoid said tariffs, leading to higher unemployment rate and lower income, therefor lower economic growth. The automobile companies want to have locations in places like China Thailand and India because they can benefit from lower costs of production however they can face consequences such as raising tariffs, the good thing about SAIC is that they have also an assembly plant in a stable economy that has good international relations such as the UK. It is challenging but they can benefit from that location in order to avoid certain tariffs by doing a great investment and moving more operations to that plant.