Volkswagen Group is considering the future of its joint venture in northwest China’s Xinjiang region and another German industrial giant is starting to sell its stake there after fresh international scrutiny of forced labor by predominantly Muslim ethnic groups.
Volkswagen said last week it was in talks with one of its main joint venture partners in China, the state-owned Shanghai Automotive Industry Corporation, following allegations of human rights abuses at their joint venture in Xinjiang.
The companies are considering “the future direction of the JV’s business activities in Xinjiang,” VW said, adding that “various scenarios are currently being intensively considered.”
Germany’s BASF, the world’s largest chemical company, revealed on February 9 that it began moving late last year to divest its stakes in two production joint ventures in Xinjiang.
BASF said that while its audits found no human rights violations at either business, “recently published reports about the joint venture partner contain serious allegations that indicate activities inconsistent with BASF’s values.”
The Chinese government has strongly opposed any move by multinational companies to distance themselves from commercial activity in Xinjiang, a sparsely populated region four times the size of California.
In a written response to a question about Volkswagen and BASF, the foreign ministry on Sunday called allegations of forced labor in Xinjiang “a lie of the century concocted by anti-Chinese forces to discredit China” and cut off China’s economy from foreign markets. The ministry added: “We hope that concerned enterprises will respect the facts, recognize right from wrong, and appreciate the opportunity to invest and develop in Xinjiang.”
VW and BASF, which have had extensive investment and sales in China for decades, are among the companies increasingly caught between Beijing on one side and Western governments, shareholders and human rights groups on the other. Scrutiny of German companies is particularly acute now as European governments grapple with how to become less dependent on China.
Pressure on the multinationals has increased in recent months as U.S. customs officials have gained experience investigating whether imports from China violate the Uyghur Forced Labor Prevention Act of 2021. The law prohibits the importation of any goods from China that were made with forced labor. especially goods manufactured with forced labor in Xinjiang. The Uyghurs, who are predominantly Muslim, are the largest ethnic group there, making up 45 percent of the population according to a 2020 census.
Companies are finding it increasingly difficult to tell whether their suppliers and joint venture partners are using parts or materials that come from northwest China and may have been produced with forced labor. China does not allow independent supply chain audits in Xinjiang and has even detained employees of foreign due diligence companies working in far less politically sensitive places like Beijing and Shanghai.
Volkswagen said it faced delays in delivering some imported vehicles to dealers in the United States due to a “customs issue” at American ports. The company said it had to replace a small electronic component, but did not say how many cars were affected.
VW did not say the part came from Xinjiang, but noted: “When we receive information about human rights risks or potential violations, we try to correct them as soon as possible.”
Nathan Picarsic, co-founder of Horizon Advisory, a geopolitical supply chain analysis firm in Washington, said hundreds and possibly thousands of Audi and other Volkswagen Group vehicles, mostly equipped with four-cylinder engines, have stopped at five U.S. ports in recent weeks because contain a component from Xinjiang that cannot be easily replaced. VW will try to deliver the cars by the end of March and is notifying customers of delays. The Financial Times first reported that the cars had been stopped at US ports.
Multinationals are also under pressure from shareholders. Union Investment, a major German asset manager, had approved investment in Volkswagen last December after a report found no forced labour. But the fund reversed course last week, saying the latest findings meant investments in VW were incompatible with corporate sustainability goals.
Stephan Weil, governor of the German state of Lower Saxony and a Volkswagen board member, called the latest findings “alarming.”
China has engaged in a widespread crackdown in Xinjiang over the past decade to combat what it describes as extremism among mainly Muslim ethnic minorities there. The crackdown followed a series of attacks in 2014 by militants, including attacks on two railway stations and a morning market that left a total of 71 dead and more than 300 injured according to official reports.
Under China’s leader Xi Jinping, Xinjiang confined hundreds of thousands of Uyghurs, Kazakhs and other Muslims to massive re-education camps, mostly starting in 2017. Xinjiang also began an effort to distribute Uyghur villagers and workers to factory jobs. Chinese officials presented these transportation projects as an effort to lift the Uyghurs out of poverty and absorb them into the economic mainstream. But the job transfers involved coercive pressure, quasi-military discipline and travel restrictions, according to investigations by the New York Times, other news outlets and human rights researchers.
Adrian Zenz, director of China studies at the Victims of Communism Memorial Foundation, a nonprofit anti-communist group in Washington, has found evidence in recent months of forced labor at a chemical company in Xinjiang that also has joint ventures with BASF. He then found evidence of forced labor at the Volkswagen joint venture.
It shared the BASF data first with German news magazine Der Spiegel and public broadcaster ZDF. He first shared the VW information with German newspaper Handelsblatt.
The VW info it included a photo of Uyghur workers in military uniforms who had helped build a desert track in Xinjiang to test cars in extremely hot weather.
BASF and VW each said they began establishing joint ventures in Xinjiang in 2013. That’s when the Chinese government encouraged investment in its impoverished far west, but before it began cracking down on ethnic minorities.
VW said its joint venture in Xinjiang’s capital Urumqi had 650 employees before the pandemic and is now much smaller.
BASF said one of its joint venture plants, in which it owns a majority stake, has about 40 employees and is a key ingredient for spandex. The other plant, in which BASF owns a minority stake, has 80 employees making a chemical with wider uses, from pharmaceuticals to plastics.
BASF said it had decided last year to divest its stakes in both plants after concluding they did not fit with its goals to tackle climate change. The factories, located in Korla, another large city in Xinjiang, use a lot of coal. But BASF said it would now speed up the process of exiting the ventures.
China’s Foreign Minister Wang Yi claimed on Saturday that the government’s policies in Xinjiang have improved the lives of Uyghurs by providing jobs. “The so-called forced labor is just a baseless accusation,” Mr. Wang said during a question-and-answer session at the Munich Security Conference.
Further trouble may lie ahead for VW and other automakers in China. Human Rights Watch issued a report on February 1 alleging the widespread use of forced labor by companies in Xinjiang that produce more than 15 percent of China’s crude aluminum. The group accused automakers of not wanting to know where suppliers of many aluminum components sourced the metal.
The United States already bans Xinjiang aluminum products from entering due to concerns that it is made with forced labor.
VW said it is investigating any misconduct by suppliers, adding, “Serious violations, such as forced labor, may result in termination of the supplier contract if corrective action is not taken.”
Christopher Buckley contributed to the report from Taipei, Taiwan and Melissa Eddy contributed reporting from Berlin.
