Industrial Sectors: Auto Parts

Honda and the auto parts industry in China

In automobile manufactures, the cost of the power control is estimated to share about 20% of the total production cost and more than 30% of the profit [NOTE1]. Compared with other auto companies in China, Honda and her Chinese partner Guangzhou Automobile Group (GAC) are reported to have the highest per car profit margin. This is largely earned from the margins gained in the auto parts procurement in China. It is estimated that up to 80% of the total production cost of Honda’s automobiles and motorcycles is spent on the sourcing of the auto parts [NOTE2] and the local sourcing rate of Honda is one of the highest in the industry up to 78% in some car models .[NOTE3] These include the sourcing of the assembled power engines and transmissions from Honda’s own subsidiaries in China via intra-firm trading and from the first-tier suppliers that have long business relations with Honda to follow and build supplier plants within the vicinity of Honda’s assembly plants in China. When Honda was beginning to globalise its production bases in key regional markets in the 1990s, the building of local auto parts production bases within the vicinity of the assembly plants is an important strategy. In China Honda has, compared with her competitors, a high in-house and local sourcing ratio in her manufacturing bases enabling direct control over the costs and the smooth running of the Honda lean production.

Honda’s entering into China in 1992 was started with technological cooperation and later manufacturing of motorcycle parts with the state-owned company Dongfeng Motor. In 1994 and 1998, Dongfeng Honda Auto Parts Co., Ltd and Dongfeng Honda Engine Co., Ltd were founded in Huizhou and Guangzhou city of Guangdong province. In Fujian province, Honda invested in Honda Mindong Generators Co Ltd in Fuzhou city. The move brought along more than thirty motorcycle parts suppliers of Honda to China which became the basis of auto parts supply for Honda when the company stepped into automobile production later. Honda’s auto supply was stratified into KD (semi-knocked down) import of core parts from the mother company in Japan, priority sourcing of other core parts from her Japanese affiliated suppliers in China, followed by other foreign owned or joint venture suppliers and the local Chinese suppliers. To illustrate, of about 1500 auto parts that Honda needed for assembly in 2005, 600 were sourced locally in China from between 120-150 first-tier suppliers in China. This was to meet the Chinese government’s requirement of 40% local sourcing for the joint venture auto companies to operate in the country. Yet, by moving into China Honda was also transplanting its own supply network to the Guangdong production base. Nearly 65% of these local first-tier suppliers were Japanese invested companies (20%) and Sino-Japanese joint ventures (45%). The other suppliers were affiliates of the European/US auto companies (15%) and domestic Chinese suppliers (20%). Without violating the 40% local sourcing threshold, the Japanese suppliers were making about 90% of the value of Honda’s total sourcing in China. Amongst these suppliers 40% were Honda’s subsidiaries or affiliated companies in which the company held shares and they took up 60% of the total sourcing value of Honda China [NOTE4]. Subsidiaries such as Dongfeng Honda Auto Parts Co., Ltd and Dongfeng Honda Engine Co. Ltd in Huizhou and Guangzhou city were supplying the transmissions, engines and parts such as the shafts and links to the three assembly plants of Honda in China (GAC-Honda, Dongfeng Honda and Honda Automobile (China)).

After 2005, the inward looking strategy for sourcing deepened with the founding of Honda Auto Parts Manufacturing Co Ltd (CHAM) in Foshan city. The factory is making transmissions which were almost exclusively KD imports from Japan Honda before. Between 2000 and 2007, Honda increased investment in the auto parts manufacturing and R&D in China for higher degree of localization of the core parts to support the enlarged production capacity of her assembly plants in China. These include Jialing-Honda Motors Co., Ltd in Tianjin in 2000, Sundiro Honda Motorcycle Co., Ltd in Shanghai in 2001, Honda Engineering China Co.Ltd and Honda Motorcycle R&D China Co., Ltd in Guangzhou in 2004, Honda Auto Parts Manufacturing Co Ltd in Foshan in 2005 and Guangzhou Honda Automobile Research&Development Co.,Ltd in 2007. The latter two subsidiaries are wholly owned by Honda to maximize the space in the Chinese government’s auto protectionist policy which restricts foreign investment in the auto assembly with a 50-50 foreign-local ownership but allows foreign investors to found wholly owned enterprises in the auto parts sector. From 2005 onward, the strategy of Honda is distinguished by its deepening the localized sourcing and manufacturing of the auto parts via its subsidiaries and affiliated suppliers in order to capture the profit margins created in the production chain as much as possible. By now, the core auto products of Honda in China are manufactured with almost the highest local sourcing rate compared with her competitors. Fit has 92% of the parts sourced in China, followed by Odyssey 80% and Accord 78% [NOTE5'. Jazz, the car model manufactured in the export base of Honda Automobile (China) in Guangzhou city for 100% export to Germany and Europe, is able to benefit from the low cost sourcing to achieve competitiveness in the export market. By creating a rather closed supply network with a high in-house sourcing ratio, Honda is able to maintain tight control over the production cost and absorbing most of the profit margins via intra-firm trading within the corporation. 

Table One: Subsidiaries of Honda in China

Honda Auto Parts Manufacturing Co Ltd (CHAM)

CHAM was founded in 2005 and the first wholly foreign invested transmission company founded in China. This was certainly an important step for Honda as well as her Chinese partner GAC for domestic production of the strategic auto parts in Guangdong province. CHAM is the fourth automatic transmission plant of Honda founded outside Japan after the ones in the US (Georgia and Ohio) and Indonesia. It is also the only supplier of Honda’s parallel shaft AT transmissions in China. 80% of the products made in CHAM are sent to the assembly subsidiaries in Guangzhou and Wuhan city. The founding of CHAM is part of the regional supply network of Honda’s globalized production. Transmissions, especially the AT transmissions share an estimated 70% of the auto parts value of an automobile. The comparatively high degree of local sourcing of the strategic transmissions compared with Honda’s competitors in China explains the cost competitiveness and high profit margin of the Japanese company in China. Up to 80% of the transmissions of Honda’s subsidiaries in China are sourced locally. The remaining 20% of the core transmission components namely the transmission shafts and gears are imported from Japan .[NOTE6] The company’s plan was to use CHAM for processing the transmission shafts and assemble the transmission boxes, eventually to move on for precision processing of the gears and control units imported from Japan. Compared with importing the parts for KD (semi-knock down) assembly of the transmissions, the cost reduction of manufacturing them locally in China is as big as 30% .[NOTE7]

CHAM was built with an annual capacity of 240,000 units with a registered capital of USD98million [NOTE8]. Its establishment in Foshan city was immediately followed by Honda’s first-tier affiliated supplier, the FCC Group which set up the Foshan FCC Co Ltd. The latter supplies 100% of its clutches and die casts to CHAM. By now, Honda has built up a network of power and control system assembly in Foshan city. Combining with the engines produced by Dongfeng Honda in Huizhou and Guangzhou, Honda has a lean production network of in-house auto parts supply to rely on for the assembly bases of GAC-Honda (Guangdong), Dongfeng Honda (Hubei) and her export base centred by Honda Automobile (China) in Guangdong.

Value Creation in Transmission Manufacturing in CHAM

The strikes in CHAM raise a number of issues about the fundamentals of labour value creation and profits made in the auto industry in China. Given that AT transmission is a core component and CHAM is Honda’s only wholly owned auto parts plant in China, it is hard to imagine that the remunerations of workers in CHAM could be so low.

Low Wages in CHAM

CHAM employs more than 2000 workers and most of them are migrant workers originated from the inland provinces and the less developed regions of Guangdong province. The major frustrations of the workers lie in the low level of wages totally disconnected from the high profit the company is making. The wage incremental and promotion system is stagnant and unfair revealing the absence of a reasonable profit sharing mechanism between the Japanese company and the local workers. CHAM workers are organized into 5 grades and each grade is sub-divided into 15 sub-grades. Promotion is based on the year end appraisal meaning that it should take 15 years for a production line worker to promote to the next grade. A pass in the year end appraisal brings only a mean wage rise of 30 yuan or so. Before the strike broke out in May this year, a grade 1 worker was receiving a basic wage of only 675 yuan compared with the legal minimum of 720 yuan (which was increased to 920 yuan just before the strike) in Foshan city. Other incentives accounted for approximately 50% of their take-home income. These include job allowance (340 yuan), full attendance bonus (100 yuan), living allowance (65yuan), housing allowance (250 yuan) and transport subsidies (80yuan). After deducting the various insurance premiums (old age insurance 132 yuan, medical insurance 41 yuan and the housing provident fund premium 250 yuan) , only 1211 yuan is left [NOTE9]. The salary of the grade 2 workers is slightly higher between 1500-1600 yuan. The conditions of the intern workers who made up to 30% of the total workforce were worse. They were paid a basic wage of 500 yuan and a monthly income of around 900 yuan including the allowances.

The low income of CHAM workers contrasts sharply with the profit Honda and GAC are making. Honda reported a net profit of USD1.5 billion worldwide in 2008. Out of that, USD1.3 billion was generated from the China market .[NOTE10] The performance of Honda in 2009 continued to benefit from the persistent sales increase in Asia and costs retrenchment. The net income of Honda in 2009 reached USD2.86 billion despite the downfall in the major markets other than Asia and China [NOTE11].

According to the statistics of the China Automobile Association (中國汽車工業協會), Shanghai Volkswagen was the best selling auto company in China in 2009 and yet it was only the fourth most profitable company. GAC ranked the 6th in terms of the number of cars sold and yet it was the second most profitable auto company in China in 2009 [NOTE12]. Thanks to the market performance of Honda and Toyota, GAC reported a revenue of USD1.79 billion and a profit rate of 10.37% in 2009 which is above the average profit rate of 7.7% of the auto sector in China .[NOTE13]

Table Two: Income and Profit of the Auto Companies in China 2009

Source of data: China Automobile Association [NOTE14]

Coming to Honda, the per car profit margin for the vehicles produced in GAC-Honda and Dongfeng Honda is the highest amongst her competitors in China. In 2006, the per car margin in the automobile industry in China was 10,643 yuan, it was 23,000 yuan per car in the case of GAC-Honda [NOTE15]. Compared with other companies, Honda produces and sells a limited range of car models in China. Nevertheless the annual profit of Dongfeng Honda for instance reached 1.2 billion yuan just from selling two car models of Civic and Accord CR-V .[NOTE16] This is attributed to the cost saving strategy of Honda which started its investment in engine and power units production in China back in 1992 before stepping into car assembly. The investment strategy enabled Dongfeng Honda to reach a much higher local sourcing rate of 78% for the auto parts by now comparing with others. This proves to be a successful strategy as more auto MNCs stepped into the Chinese market after 2005. The cost benefit of localized auto parts production allows Honda to maintain its profit margin despite a number of price slums in the auto market in China since 2008.

Yet the labour reward to the auto parts workers of Honda in China is far lagging behind the rapid growth of the industry and the company’s business success. The labour market in the auto sector in China is segmented into a regular sector of the assembly workers and the irregular sector of the auto parts workers. In the case of Honda in China, although a large part of the profit margin of the company is generated from local auto parts manufacturing, the salary and welfare of Honda’s auto parts workers is much lower than their counterparts in the assembly factories.

In GAC-Honda and the Assembly Sector

The remuneration and welfare of the assembly line workers in GAC-Honda is significantly different from those of the auto parts workers in CHAM. GAC-Honda has a more egalitarian income structure. A probation worker receives nearly 3,000 yuan a month to be increased within 20% after the probation ends. Interns are not used on a large scale. There are regular incentives include overtime compensation and allowances eg allowance for special work, allowance for work under high temperature, allowances for late marriage/late pregnancy; and bonuses linked to the corporate profit. As a result of the high revenue earned by the company, all workers were paid 18.5 months’ salary a year in 2008 and 2009 (double pay in July and August and another extra 4.5 months’ basic wage at the end of the year) which is above the market rate in the auto industry. Besides, there are welfare provisions such as festival awards; transportation and housing allowance (500 yuan each per month); food subsidy (100 yuan per month); free work uniforms and laundry; shuttle bus services, as well as social insurances as required by the law. Like most auto companies, GAC-Honda offers worker training programmes and internal discounts for buying cars to the workers [NOTE17]. A GAC-Honda assembly line worker is receiving, by rough estimate, an annual salary between 50,000-60,000 yuan which is higher than the market median. A market survey finds that the labour market of the auto industry is highly segmented in China: workers in the western auto MNCs are receiving an annual salary of about 70,000 yuan, to be followed by the Japanese and Korean auto MNCs paying 30,000-50,000 yuan. At the bottom of the market lies the domestic auto companies which are paying an annual salary of 1,2000 to 30,000 yuan to their assembly workers [NOTE18]. The survey finds that despite the rapid growth of 48% in the car sales in the Chinese auto market in 2009, the salary of the auto assembly workers has raised by only 10% in general; and this is accompanied by increasing work intensity, longer working hours, not to mention the growing trend of wide use of interns, irregular workers and the enlarged income gap between the management and production line workers, as well as between the Chinese and the expatriate workers [NOTE19]. In the auto parts sector and especially in the foreign owned auto parts factories, “low income is the general situation.” 

Labour Regime in CHAM
Evidenced by the low wages disclosed by the CHAM workers, the 30% reduction in the production cost of localizing the sourcing and manufacturing of the auto parts in China as conveyed by Honda [NOTE20]is based on the appropriation of the labour value of the Chinese auto parts workers. This is achieved in a number of ways.

De-skilling and Low-Cost Labour in Lean Production
CHAM is the fourth AT transmission plant directly invested by Honda outside Japan. The production and management system of CHAM is a transplant of the mother company’s. The production is divided into 5 sections: assembly, casting, gear, aluminum processing and shafts. The assembly is the last section organized into two production lines staffed by 200 workers. Yet fresh interns are widely used up to 50% in all the departments. In the assembly lines 80% of the workers are interns who have been trained for two weeks before the placement. Their work is mainly involved with machinery operations for processing and polishing of the shafts and other semi-finished components. The work has low skill content which takes the interns only a few days to catch up with the regular workers and meet the target of polishing 900 shafts a day. This is one of the major complaints of the interns whose frustrations come from the lack of prospect of the job. The workers recruited by CHAM are mainly graduates or students from the vocational secondary schools which distinguishes them, and more accurately, their career expectations from other migrant workers employed in the labour-intensive industries [NOTE21]. Yet CHAM seems to be a sub-contracting processing plant that uses the low labour cost in China and the intra-firm trading to maintain the high price of the technology-intensive part of the transmission manufacturing which is held in the mother company. Rather than external outsourcing, Honda’s direct investment in CHAM for in-house supply of the AT transmissions in China firstly enables the company to minimize the manual labour cost in the production as much as possible, appropriates the price differences in selling the parts to her assembly subsidiaries and other companies, and to maximize the just-in-time production. In Honda’s lean production, the value of manual labour lies in the flexible mediation of the tempo of supply and production for zero waste, zero time loss and zero inventory. The value of the manual labour is to maximize the production of the machinery rather than being replaced by it.

The up-shooting figures of imported AT transmissions to China after 2005 of the auto MNCs in China is masking the lucrative trading of high-end, high-valued auto parts between the mother countries and China, and the profit created in the intra-firm trading of these core auto parts within the MNCs’ production network inside China. In 2006 the production of automobiles in China started to jump and 1.6 million cars were manufactured locally rising by 56.5% compared to 2005 and yet the AT transmissions were imported at a much faster rate growing by 80.62% .[NOTE22] The high import rate of AT transmissions continued to rise to 1.89 million units in 2008, increasing by 86.5% compared with 587,000 units in 2004 [NOTE23]. Guangzhou city, mainly the three Japanese auto joint ventures of GAC-Honda, GAC-Toyota and Dongfeng Nissan in Guangzhou were the biggest importers consuming 28.89% of the country’s total import of AT transmissions in 2007 .[NOTE24] And Japan was the biggest exporting country of AT transmissions to China in the same year: about 68.21% (889,945 units) of the imported AT transmissions in 2007 were made in Japan .[NOTE25] The Guangzhou customs estimated that the import value of the AT transmissions in 2009 (Jan-Nov) alone cost USD500million, which was 55.8% increase from 2008. Including the un-specified transmissions and control units, these three items took up 45.8% of the total value of the imported auto parts to China in 2009 [NOTE26].

Table Three: Number of automatic transmissions imported to China 2005-2007 September

Source: Zhu and Wang(2007) [NOTE27]

Table Four: User Companies of the Imported AT Transmissions in China (Jan-Sep 2007)

Source: Zhu and Wang(2007)

Therefore despite the increasing localization rate of Honda and the auto MNCs in auto parts sourcing in China, that seems to have little effect on the reliance of China on the import of the core auto parts such as the AT transmissions from the mother countries of these MNCs. This explains indirectly the surprisingly low wages and the wage gap between these processing workers and the Japanese expatriates in CHAM as well as the Chinese workers’ sense of alienation in the production line: the processing work in CHAM is largely of low skills content.

Yet de-skilled manual labour plays a critical role in the lean production. It is the most flexible factor of production in adjusting the tempo of production for minimum waste, maximum value creation and therefore cost control. The work of Honda’s assembly and auto parts plants are so organized that before reaching full production capacity, manual labour is always the priority, to be shifted to semi-automatic and completely automatic operation as the set target and size of production increases [NOTE28]. As proved in the CHAM strike which caused the 4 assembly plants of Honda to come to a standstill, these workers, though de-skilled, are playing a critical role in the just-in-time delivery of the lean production. Yet the long-established low cost migrant labour regime so generalized in China seems to override the critical value of the workers. The bargaining power of the CHAM workers lies not in their skills for that is not required in the production of the transmissions, but their position in the lean production system which has only a thin buffer to protect the just-in-time delivery and assembly of the automobiles. And the workers were aware of this when they were taking the industrial actions [NOTE29]. The Chinese workers in CHAM are easily replaceable. Their value lies in their conforming to the “lean”. The labour regime in CHAM and Honda’s auto parts subsidiaries in the region works to ensure that their labour value will be continuously secured and paid at a low wage for low-cost in-house sourcing and domestic trading at a high profit margin with other auto companies inside China. The blunt appropriation of the low-cost labour in China is not a secret. Admitted even by the trade union, the transmissions produced by CHAM costing not more than 10,000 yuan a unit are sold for 20,000 yuan to the joint venture GAC-Honda and 40,000 yuan a unit to the 4S stores in China [NOTE30]. The rapid growth in the profit rate of Honda in China is radically contrasting with the economic rewards it is willing to share with the workers.  

Labour Regime in the Auto Parts Industry in Guangdong Province
Internships in lieu of Regular Employment and Labour Conformity

Amongst the more than 2000 production line workers in CHAM, at least one-third of them are interns. In the third and last year of their study, they are placed in the company for on-the-job training. Most of them are originated from the less developed cities and towns outside the Pearl River Delta area studying in the vocational schools. They are sent by the schools for one-year internship in CHAM to be subject to the company for changing to regular workers after their services.

The interns are aged under 20 years old majoring in related disciplines such as casting and mechanics in the vocational schools. The school fees they pay range from 2700 to 12,000 yuan (US395-1764) a year not including books and materials. Yet for doing the same job as the regular workers in CHAM, they receive a basic wage of only 500-600 yuan and a monthly income of 900-1000 yuan including the overtime and compensations, which is barely enough to cover the school fees .[NOTE31] The placement is disillusioning as they are doing repetitive and low-skilled work on the production line irrelevant to their learning in schools. In their words, “We agree absolutely this is a high-class looking sweatshop. The biggest pity is that we are buried here. We have learned nothing. The so-called training – it is something that anybody can learn and become proficient in it by spending a day or two on the production line [NOTE32].” They are clear about the lack of promotion and the stagnant wage structure of the senior workers. Regularization to formal employment after the internship is not appealing to them because of the lack of prospect and the poor pay of the work. However, the interns’ participation in the strike enhances the power of the workers contributing to the halt in the production of CHAM and the assembly factories of Honda. As the strike resumed in the late June, the vocational schools and the teachers were mobilized to have face-to-face talk with the students persuading them to quit the strike and sign the no-strike agreement letter. These letters were torn into pieces on the floor of the interns’ dormitories.   

The use of interns is first of all a cost reduction strategy for Honda. The interns are not entitled to the labour law protection fully. Irregular workers including interns and youth workers are protected by the major labour legislations such as Labour Law and Labour Contract Law, but not covered for social security provisions. This means at least 21% of the per head salary is saved for the company. The double exploitation of the interns works through unequal pay and rights for equal work between the interns and the regular workers, while generating profit to the company, income and government’s subsidies to the schools. The ACFTU does not have a position on internship labour; and the local branch of the union in CHAM was more eager to get the workers and interns back to work after the strike broke out. Internship is a cost strategy enabled by the de-skilling that builds up a replaceable workforce for flexibility and conformity. It is not surprising that more interns were used after June to replace the active workers in the strike. This led to the second strike in CHAM two months later in August. The dispute has not ended yet. Discipline and conformity being the issue, it is also the role of the vocational schools and the teachers who were mobilized to come to CHAM for face-to-face talk with the interns in the high tide of the strike in late June. The new internship contract that the teachers persuaded the workers to sign contains explicit clauses of no participation in stoppage of work, slow-down, and no violation of the factory regulations. One also has not forgotten the two leaders in the strike who were dismissed by the management on 22 May for “violating the factory regulations and instigating workers to stop work and strike”. Taking industrial actions is a violation of Honda’s factory regulation to be punished. This, as well as the dismissal of the two leaders, was regretfully not disputed by the plant union or the upper level union.

The internship system enables CHAM to have labour replenishment serviced by the local government and agencies to maintain a manual workforce that conforms to the flexibility and tempo of the lean system. The domestic background for that is the increasingly common and institutionalized “internship phenomenon” in China supported by local governments and employers. Internship in lieu of regular employment is becoming a trend in the auto industry especially in the auto parts sector and the domestic auto companies where practices are less regular. These internship schemes are a means of the government in the labour-exporting provinces to create employment to the rural surplus labour and for the government in the labour-importing provinces to relieve the labour shortages faced by employers in the labour intensive industries. Since the Guangdong government laid down the grand strategy of industrial up-grading in the Plan for the Development of the Nine Pillar Industries in Guangdong Province (2005-2010) in 2005, the “double transfer” strategy was promoted to relocate the polluting and labour intensive industries from the Pearl River Delta (PRD) area to the northeast and northwest region, replacing them by capital intensive ones such as the auto industry. This is accompanied on the reverse by the transfer of rural surplus labour from these less developed regions to the PRD to support the new industrialization. There are 410 vocational secondary schools in Guangdong province participating in the “labour transfer” programme of the provincial Ministry of Education. In 2008 the programme trained more than 500,000 students for vocational education [NOTE33]. On a year basis, the province is recruiting an average of 150,000 junior high school students from the less developed regions (from in and outside the province) for vocational training and placement in the companies [NOTE34]. The institutionalization of these practices are reinforced by the linked-up interests of the local Office of Poverty Alleviation and Development of the less developed regions, the Ministry of Education and the Occupational Skills Training Centres of the Ministry of Labour, and the companies so much as that the content and placement terms of the internship programmes are based on the needs and the labour replenish rate of the companies [NOTE35]. In this sense, the trend of irregular forms of employment found in the auto MNCs and the supply companies in Guangdong province is tolerated, if not promoted by the government.

Market Domination and Clustering of Labor Standards

The low wage regime in CHAM is not a single isolated example but the general condition in where CHAM is located. It is the result and the reproduction of the low-wage-based development model that Guangdong province has been relying on for achieving the fast speed economic development in the past 30 years.

CHAM is located in Shishan town of Nanhai district of Foshan city in Guangdong province. Foshan city was integrated into the administration of Guangzhou, the provincial city of Guangdong. Economic development in Foshan has been led by domestic small-medium-sized capital in the light and labour intensive industries producing consumables such as electrical appliances, furniture, ceramics, garments etc. The bottleneck was met after 2000 with overproduction in the domestic market and increasing foreign competition. Since 2002, Shishan town has been actively developing projects inviting foreign investment in the auto parts industry. This is part of the grand industrial re-structuring plan of Guangdong province launched in the 10th Five Year Plan (2001-2005) and the11th Five Year Plan (2006-2010). The industrial re-structuring plan, referred to allegorically as “Empty the cage and keep a new bird”, is to increase the capital and technological intensity of the secondary industry and development of the tertiary industry. Nine pillar industries, of which the auto industry is one of the cores, were selected for priority development to replace the low value added, polluting processing industries [NOTE36]. In 2005, the Guangdong government launched the “Development Plan of the Auto Industry of Guangdong Province 2005-2010” which exemplifies the goal of building the automobile manufacturing base in the provincial city of Guangzhou as the fourth largest auto belt in the country [NOTE37]. The assembly base in Guangzhou will be supported by an auto parts production belt in the Pearl River Delta area. The auto base should be developed on the basis of the leading auto enterprises in the province namely GAC, Honda, Toyota and Nissan. Immediate to the auto base in Guangzhou should auto parts manufacturing clusters be built in Foshan and Nansha city. The policy goal defined by the Guangzhou government is to increase the total industrial value of the Guangzhou auto industry to above 300 billion yuan and to expand the production of assembled car capacity to 1.3 million. Special focus is put on the development of the auto parts industry with the aim of reaching an industrial value of 80billion yuan by 2010 [NOTE38]. GAC, and via its partnerships with the Japanese auto MNCs, is the vehicle for upgrading the industrial basis, creating higher GDP and improving the quality of the labour structure of the province.

Auto Parts Clusters in Foshan city

Compared with other towns in Foshan city where the domestic capital plays key role in industrialization, the development of Shishan town has been lagging behind and the catch up was mainly driven by foreign investment mainly in the auto parts and related industries. Within 5 years, the economic value of Shishan town expanded three times from 16.6 billion yuan in 2004 to more than 45 billion yuan in 2009 and a GDP exceeding 40 billion yuan outpacing the counterpart towns in Foshan [NOTE 39]. By 2009, Foshan city already has 300 auto parts companies of which 107 of them are joint ventures. Their cumulative investment amounts to US9.9 billion [NOTE40] and the industrial value created by the auto parts industry reached 22.8 billion yuan in 2009 [NOTE41]. Shishan town of Foshan city, where CHAM is located, has attracted more than 50 auto parts companies and the aggregate investment of these enterprises amounts to 2.42 billion yuan [NOTE42]. The first-tier suppliers of Honda and Toyota, many of them are affiliated companies of the two auto companies, have followed their customers and establish factories in Shishan town. Their investment has boosted the industrial value of the auto related sector by 26% to 12.1 billion yuan in 2009 [NOTE43].

Table Five: Japanese Auto Suppliers in Foshan City

Source: Toyota Boshoku Foshan Co Ltd 2009 [NOTE44]

The auto parts suppliers listed in Table Five are the large scale major suppliers to the three Japanese auto companies Toyota, Honda and Nissan in Foshan city. The clustering of these companies has the effect of creating a sub-labour market of the auto parts sector in the local economy. In general, the working conditions of the auto parts workers in China are worse compared with the assembly workers. The annual salary of the production line workers averages around 10,000-20,000yuan ie between 800-1,600 yuan a month. Their wages are based on a lower than the legal minimum basic structure to be compensated mainly by income from long overtime work. Similar to the assembly workers, there is no formal wage incremental structure. Worse than their counterparts, annual bonuses linked to the company’s sales performance is not the rule except in a handful of rare cases. Other labour standards are irregular such as working hours, rest days, and social insurance provisions are not complying with the law. The use of interns in the auto parts sector is also on the rise and the interns are paid with 800-900 yuan a month without social insurance provisions [NOTE45]. Due to the intense competition in the automobile market, the auto parts sector in China becomes the buffer which absorbs the costs transferred by the assemblers. One reason for it is that the auto parts sector in China remains a de-skilled and labour intensive sector serving mainly in processing and machine operation. Labour is not the biggest cost factor in the production chain but the most flexible one. The fact that the low wage phenomenon is found not only in the irregular, small-sized domestic parts factories but in the first-tier joint ventures and the wholly foreign owned subsidiaries of the Japanese companies shows that low-cost-auto-parts is not a single case of abuse but the general rule for capital accumulation in the auto industry in China.

The economic and political value of the auto and auto parts sector to the local government enables these companies to create domination in the local labour market which reinforces further the general labour practices found within the sector. The auto parts clusters have at the same time created wage clusters and norms in the local region. It is not necessary for single employer and not likely for workers in a single company to make changes for better conditions. In the auto parts sector in Shishan town these norms include: minimal observation to the legal demands on wages, marginal violations of the labour laws in different ways and combinations, de-linking if not absence of a wage incremental system from the company’s profit level, and selective implementation of the government’s labour policies eg the central government’s promotion of collective wage negotiation at the workplace is not implemented in CHAM and the region. Without too much distinction between the types of capital, regular auto parts workers in Shishan town are receiving more or less the “market” wage of 1,000-1,300 yuan a month including the overtime and incentives; and the intern workers receiving not more than 1,000 yuan without social insurance provisions. These “market norms” are tolerated by the local government and the trade union as long as they meet the legal standard “nominally” [NOTE46].

It is only through the strikes that the market domination of the auto parts capital and the political domination of the government on the migrant labour regime are disrupted. The local township government pretends to be neutral insisting that Honda has not violated the labour law and wage rise is a voluntary issue between the workers and the management to be best resolved by the trade union. But the Guangdong government is eager to end the strike as soon as possible not by repressive means but positive intervention fully aware of the connection of the political and economic interests between the Japanese auto company and the government. This is displayed in the high profile intervention of Zeng Qinghong during the strike and the negotiation, himself being the General Manager of GAC and a member of the National People’s Congress.

IHLO

July 2010

For more articles and appendix see :

A Political Economic Analysis of the Strike in Honda and the auto parts industry in China

Implications of the Strike in Honda Auto Parts Manufacturing Co Ltd (CHAM)

Appendix One : Chronology of Honda Workers’ Strike in CHAM

Appendix Two: The Automobile Strategy of the Guangdong Government and the Guangdong Automobile Group

Appendix Three: Policies of the Chinese Government on the Automobile Industry

Open Letter from the Delegation of Representatives of the Honda Strike Workers

NOTES: