Toyota Hit By China Strike

Toyota Motor (NYSE: TM) has been hit by labor strikes in China. The Toyoda Gosei Co. plant in the northern city of Tianjin is owned 42% by Toyota along with a local partner. The work stoppage follows similar strikes at Honda plants and those of its suppliers.

The two companies will be under pressure to settle with unions. The Chinese car market is not only the largest in the world, it is one of the fastest growing. Some estimates put sales on the mainland at 16 million units this year, about 40% higher than the US.

Toyota and Honda are chasing market share leaders VW and GM. Any break in their production could hurt the chances at improving sales at a rate faster than the growth of the overall market.The new strike highlights the problem the central government faces with work stoppages that are spreading around the country. Recently, China’s premier said that the country’s workers deserve a fair wage. But if  foreign manufacturers pay higher wages, the workforce in China’s own factories will insist on the same.

China, by most measures, cannot afford to have big increases in the costs of running its factories. The slowing of growth in Europe and modest recoveries in Japan and the US make the demand for manufactured goods unlikely to rise quickly. China’s exports rose 50% in May, but much of that was for inventory replacement among China’s trading partners. Those replacements will slow unless an unlikely  surge in consumer activity in moribund economies occurs.

Chinese wage improvements may increase the consumer spending inside its own borders, which would help support factory activity, but a large improvement in demand could also exacerbate the country’s growing inflation problem.

Rising labor costs  is one reason the nation is resisting a revaluation of the yuan because it leads to higher prices for manufactured goods. It would be very hard on the economy of the People’s Republic if exports were affected by both labor and unfavorable currency exchange rates.

The Honda and Toyota strikes are about to become a symptom of much larger trouble in the Chinese economy.

Douglas A. McIntyre