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Honda to Resume Some China Production Amid Parts Plant Strike

May 28 (Bloomberg) -- Honda Motor Co., Japan’s second-biggest carmaker, said it will resume some production in China as it seeks to reach an agreement with workers to end a strike that halted all its production in the country.

Honda will build 50 Jazz compacts at its export-only factory in Guangzhou, Guangdong province on May 31 using component inventory, Tomoko Uchida, a company spokeswoman in Tokyo, said by phone today. Production at the carmaker’s three other plants will remain suspended for an indefinite period as labor negotiations continue, she said.

Honda shut down all four of its auto plants earlier this week in China after 1,850 workers at a parts unit went on strike demanding a pay rise, stopping production in the world’s biggest car market. Trade unions and employers appear to be reporting a growing number of strikes in China, although there are no official numbers, according to International Labor Organization in Beijing.

“Automakers in China including Honda will definitely face rising cost pressure due to higher raw material prices and labor expenses over the next three to five years,” said Yale Zhang, a Shanghai-based director at CSM Asia, an automotive consulting company. Still, a “temporary suspension of production won’t cause a major impact on Honda’s China operation.”

Honda, the maker of Accord and Civic cars, closed two plants in Guangzhou on May 24 and factories in Guangzhou and Wuhan, Hubei province, on May 26, the company said on May 27. Workers making transmissions and engine parts at Honda Auto Parts Manufacturing Co. in Foshan, Guangdong province, went on strike May 17, said Zhu Linjie, a Beijing-based spokesman for Honda on May 27.

Walked Out

About 1,850 workers at Honda Auto Parts Manufacturing Co. in Foshan, Guangdong, walked out May 17 demanding a pay raise, causing Honda to halt output at four assembly plants beginning May 24 as parts ran short.

The 1,850 workers at the parts plant are demanding monthly pay be boosted to between 2,000 yuan ($293) and 2,500 yuan, from 1,500 yuan, Honda spokeswoman Yasuko Matsuura said on May 27.

The action is a sign that automakers can expect rising labor costs in China, said Yasuhiro Matsumoto, an analyst at Shinsei Securities Co. in Tokyo.

“China is quickly turning into a developed market from an emerging market, and labor costs will rise fast,” Matsumoto said. Carmakers “have no choice but to accept cost and wage increases if they are to continue business in the market.”

16 Million

The nation’s vehicle sales may rise 17 percent this year to 16 million as annual demand for automobiles may eventually exceed 30 million, according to an official at the State Information Center.

Shares of Honda gained 0.11 percent to close at 2,778 yen in Tokyo.

The walkout is the first to stop Honda’s production in China. The company isn’t disclosing how many vehicles have been affected.

Honda’s sales in China accounted for 17 percent of its global sales last year, the carmaker said. The company’s namesake brand ranked fifth in China by unit sales in April, according to J.D. Power & Associates. Honda may increase China sales 9 percent this year to 630,000 vehicles, Chief Executive Officer Takanobu Ito said last month.

The parts factory, a wholly owned Honda subsidiary, started production in 2007 and makes transmissions for the Accord, City Odyssey and Fit models, according to the company.

Honda plans to raise production capacity in China by 28 percent to 830,000 vehicles a year by the second half of 2012 and introduce two new models as car demand grows in the country, Chief Executive Officer Takanobu Ito said in Guangzhou on May 25.

Labor Shortages

More than 90 percent of companies based in China’s Pearl River Delta region, which includes Guangzhou, reported labor shortages that added up to about 2 million workers, China’s Southern Metropolis Daily reported in February.

“The country is experiencing a labor shortage that’s shifting the natural bargaining power to workers,” Chang-Hee Lee, a Beijing-based industrial relations specialist at the International Labor Organization, said yesterday.

Honda doesn’t yet have an estimate of output lost to the strike and can make up for it later, Zhu said on May 27. The affected factories, joint ventures between Honda and its Chinese partners, make models including the Accord sedan and Civic compact and have combined annual capacity of 650,000 units.

Ongoing Strike

The strike is continuing and the workers’ union is complying with labor laws and regulations, its chairman, who identified himself only by his surname, Wu, said when reached by phone today. He declined to comment further.

Local government officials in Foshan City’s Shishan county are involved in the talks between workers and the automaker, Honda’s Zhu said on May 27. The local government issued a statement a few days ago that said that Honda hadn’t violated China’s rules on workers’ compensation or their working environment, he said.

“If the workers are paid more, people’s spending power will gradually go up, but that’s a long process and companies will suffer with higher costs,” said Shinsei’s Matsumoto.

Japanese factory workers probably earn 10 times more than China based factory workers, said Koji Endo, a Tokyo-based analyst at Advanced Research Japan.

Honda produces about 3,000 vehicles a day in China, Endo said. “They will probably be able to make up for the production loss later in the year,” Endo said.

To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net

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