Automotive industry transformation and tariffs have long-term implications for airfreight

The tariff war between China and the U.S. escalated Aug. 23 when China responded to the U.S.’ announced tariffs ranging from 5% to 10% on $75 billion worth of U.S. goods, to be implemented in two batches effective on Sep. 1 and Dec. 15. Soon after China’s announcement, the U.S. hit back by raise existing duties on $250 billion in Chinese products to 30% from 25% effective on Oct. 1. Tariffs on another $300 billion in Chinese goods, which become effective on Sept. 1, will be 15% instead of 10%. Confused? So are many shippers and logistics professionals.

Customs brokerage firms and agents will definitely have their work cut out for them through the end of the year trying to figure all of this out. Of particular interest is China’s plan to implement a 25% tariff on U.S. cars and a 5% tariff on auto parts and components, which China had paused in April but will now also go into effect on Dec. 15.

Boston Consulting Group estimates that China is the second-largest exporter of auto parts and components to the U.S. just behind Mexico with more than 1,000 Chinese companies that export auto parts to the U.S to automotive companies and parts stores. Based on U.S. Census Bureau data for air volumes in kilograms, 2018 Chinese exports of auto parts to the U.S. increased 6.6%; however, for the first six months of 2019, volumes are down 17.7%.

Meanwhile, U.S. car sales for the first six months of 2019 declined by 2.4% after a slight increase of 0.3% for all of 2018. Freight forwarder Panalpina affirmed this auto market decline in its second-quarter 2019 earnings announcement, with management stating that “substantially lower volumes in the automotive sector” was the main reason for the decline in its airfreight gross profit.

The volume declines the industry has experienced so far this year are likely due to more than the trade war. Indeed, the automotive industry is under financial and political pressure as it undergoes a massive transformation.

The automotive industry supply chain is complex and global. In fact, one would be hard-pressed to find an automobile completely sourced and assembled in the U.S. much to the chagrin, perhaps, of certain politicians. This embrace of globalization by the automotive industry has resulted in political pressure, at least for the U.S. Big Three manufacturers, to relocate manufacturing back to the U.S. from such countries as Mexico and reopen closed U.S. facilities. While few have bowed to the pressure, the real concern for the industry is the transformation that is underway. This change can best be described by a quote in the PwC report, Five Trends Transforming the Automotive Industry, “The automotive future is electrified, autonomous, shared, connected and yearly updated.”

Indeed, auto parts that are used today such as the combustion engine will become obsolete as batteries take over as the heartbeat of the transformed vehicle. Combined with various technologies and sensors, the automobile will become, for lack of a better description, a computer on wheels. As such, PwC expects these major forms of mobility to lead to a possible reduction in inventory from 270 million vehicles in 2017 to 212 million vehicles by 2030. Of these 212 million vehicles, 7% will be shared vehicles and almost 10% could be autonomous.

PwC further cautions, “At the same time, more and more new competitors will force their way onto the market, which will make life difficult for the old-timers. All these trends are likely to come to a head between 2020 and 2025 – which means that these are the decisive years for manufacturers and their suppliers.”

Overall, auto parts will certainly look different in the coming years and perhaps sourced from different countries versus today – possibly sourced even closer to the final customer thanks to such technologies as additive manufacturing. In addition, while it’s likely the “just-in-time” logistics business model will continue, it will probably be more controlled and better managed via inventory management systems connected with transportation management systems, along with advanced data analytics and forecasting tools.

The current tariffs will hasten this transformation and as such, the automotive supply chain will shift in support of the changes. Transportation carriers, including air cargo providers, will respond to these new demands of the transformed automotive industry. The truly successful carriers, including logistics providers, will be more proactive and anticipate these demands beforehand by understanding the shifts and changing trends of their automotive customers.

Cathy Morrow Roberson is founder and president of the logistics-focused market research firm, Logistics Trends & Insights, based in Atlanta. Previously, Cathy spent several years with consulting firms, as well as with UPS Supply Chain Solutions, where she supported its market, operations, competitive and mergers & acquisition research and analytics. She also is a Senior Consultant at Cargo Facts Consulting and writes a weekly column for Air Cargo World.