Add It To the List: A Drought in China Becomes the Auto Industry’s Latest Headache

Supply from Sichuan

If the last two years have been challenging for the world’s economy — and society as a whole — times have been especially hard on the auto industry. Amid a series of other challenges, a serious drought in China poses the latest problem.

Sichuan province, located in the southwestern region of the country, contains a stretch of Asia’s longest river, the Yangtze. That body of water supports hydroelectric power, which is utilized by autoparts makers. As the river’s level has dipped, electricity has become more scarce and parts makers have been forced to shut down plants, further threatening the supply of car parts.

Request for Relief

As the drought’s impact has become more apparent, a number of automakers have petitioned the Chinese government for help. Specifically, Tesla (TSLA) and SAIC Motor have asked officials in Shanghai, considered the financial capital of China, to lean on Sichuan officials in a bid to have power diverted to auto parts manufacturers.

For Tesla, any decline in the Chinese production of batteries or auto parts poses a significant issue. More than 25% of the company’s 2021 sales were in China. It also has a plant in Shanghai, which stands as Tesla’s most productive assembly site. Additionally, the issue has the potential to negatively affect GM (GM) due to the joint venture it has with SAIC, which produces EVs in China.

Broader Market Impact

The auto industry’s woes have been well-documented as pandemic-related challenges have bore themselves out. Supply-chain delays and chip shortages have caused new and used car prices to spike in the US.

Any reduction in China’s ability to produce car parts may have a similar negative result. If parts are in short supply, assembly factories could be forced to go idle or cut their production schedules. The pandemic and its fallout have resulted in numerous challenges for many different sectors, but few could have predicted how beleaguered the supply chain would become — especially for automakers.

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