Volkswagen and BASF Are Reconsidering Ties to Xinjiang, China

Volkswagen Group is reviewing the future of its joint venture in the Xinjiang region of northwestern China and another German industrial giant is starting to sell its stakes there following new international scrutiny of forced labor by predominantly Muslim ethnic groups.

Volkswagen said last week that it was in discussions with one of its main joint venture partners in China, the state-owned Shanghai Automotive Industry Corporation, in the wake of allegations of human rights violations at their joint venture in Xinjiang.

The companies are examining “the future direction of the J.V.’s business activities in Xinjiang,” VW said, adding that “various scenarios are currently being examined intensively.”

BASF of Germany, the world’s largest chemical company, disclosed on Feb. 9 that it began moving late last year to divest its stakes in two manufacturing joint ventures in Xinjiang.

BASF said that while its audits had not found human rights violations at either operation, “recently published reports related to 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 corporations to distance themselves from commercial activity in Xinjiang, a sparsely populated region four times the size of California.

In a written reply to a question about Volkswagen and BASF, the foreign ministry on Sunday called allegations about forced labor in Xinjiang “a lie of the century concocted by anti-China forces to discredit China” and to cut off China’s economy from foreign markets. The ministry added, “We hope that the enterprises concerned will respect the facts, recognize right and wrong and cherish the opportunity to invest and develop in Xinjiang.”

VW and BASF, which have had extensive investments 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. The scrutiny on German companies is particularly sharp now as European governments grapple with how to become less reliant on China.

Pressure on multinationals has increased in the past few months as American customs officials have gained experience in investigating whether imports from China violate the Uyghur Forced Labor Prevention Act of 2021. The law bars the import of any goods from China that were made with forced labor, particularly goods made with forced labor in Xinjiang. Uyghurs, who are predominantly Muslim, are the largest ethnic group there, making up 45 percent of the population according to a census in 2020.

Companies have found it increasingly difficult to figure out whether their suppliers and joint venture partners are using components or materials that are from northwestern 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 who work in far less politically sensitive places like Beijing and Shanghai.

Volkswagen said that it had encountered delays in delivering some imported vehicles to dealers in the United States because of “a customs issue” at American ports. The company said that it needed to replace a small electronic component but did not say how many cars were affected.

VW did not say that the component was from Xinjiang but noted, “When we receive information on human rights risks or potential infringements, we strive to remedy them as quickly as possible.”

Nathan Picarsic, a co-founder of Horizon Advisory, a supply chain geopolitics analysis firm in Washington, said that hundreds and possibly thousands of Audis and other Volkswagen Group vehicles, mostly equipped with four-cylinder engines, have been stopped at five American ports in recent weeks because they contain a component from Xinjiang that cannot easily be 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 American ports.

Multinationals are also under pressure from shareholders. Union Investment, a big German asset management firm, had endorsed investments in Volkswagen last December after a report that found no forced labor. But the fund reversed course last week, saying the latest findings meant that investments in VW were incompatible with its corporate sustainability goals.

Stephan Weil, the governor of Lower Saxony state in Germany and a member of Volkswagen’s board, called the latest findings “concerning.”

China has engaged in an extensive 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 assaults on two train stations and a morning market that left a total of 71 dead and over 300 injured according to official reports.

Under China’s leader, Xi Jinping, Xinjiang confined hundreds of thousands of Uyghurs, Kazakhs and other Muslims in vast re-education camps, starting mainly in 2017. Xinjiang also embarked on a drive to allocate Uyghur villagers and laborers to jobs in factories. Chinese officials presented those transfer projects as an effort to lift Uyghurs out of poverty and absorb them in the economic mainstream. But the labor transfers have involved coercive pressure, quasi-military discipline and restrictions on movement, according to investigations by The New York Times, other news outlets and human rights researchers.

Adrian Zenz, director of China studies at Victims of Communism Memorial Foundation, a nonprofit anti-communist group in Washington, 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.

He shared the BASF evidence first with Germany’s Der Spiegel newsmagazine and the ZDF public-service television broadcaster. He shared the VW information first with the German newspaper Handelsblatt.

The VW information 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 that they started setting up joint ventures in Xinjiang in 2013. That was when the Chinese government was encouraging investments in its impoverished far west but before it began its crackdown 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 that one of its joint venture factories, in which it holds a majority stake, has about 40 employees and makes a key ingredient for spandex. The other factory, in which BASF holds a minority stake, has 80 employees who make a chemical with broader uses, from pharmaceuticals to plastics.

BASF said it had decided last year to dispose of its stakes in both factories after concluding that they did not fit its goals for addressing 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 pulling out of the ventures.

China’s foreign minister, Wang Yi, asserted on Saturday that the government’s policies in Xinjiang have improved the lives of Uyghurs by providing jobs. “The so-called forced labor is only a groundless accusation,” Mr. Wang said during a question-and-answer session at the Munich Security Conference.

A further problem may lie ahead for VW and other automakers in China. Human Rights Watch issued a report on Feb. 1 asserting widespread use of forced labor by companies in Xinjiang that produce over 15 percent of China’s raw aluminum. The group accused automakers of not wanting to know where their suppliers of many aluminum parts actually obtain the metal.

The United States already prohibits the entry of products made from Xinjiang aluminum because of concerns that it is manufactured with forced labor.

VW said that it investigates any misconduct by suppliers, adding, “Serious violations, such as forced labor, can lead to termination of the contract with the supplier if no remedial action is taken.”

Christopher Buckley contributed reporting from Taipei, Taiwan, and Melissa Eddy contributed reporting from Berlin.