With the nation’s largest auto show underway in Chicago this week, automakers are grappling with a host of external issues not related to showing off their latest and greatest innovations to the world.
Ready to be signed into law by the legislative bodies in the participating countries, the new United States-Mexico-Canada Agreement (USMCA) is one development that could bring both challenges and opportunities for American car makers and their global supply chains.
According to the Government of Canada, this “new NAFTA” trading relationship incorporates new and updated provisions focused on trade issues related to promoting opportunities for the nearly half-billion people who reside in North America.
Targeting the Auto Supply Chain
According to IndustryWeek, while NAFTA originally required automakers to use 62.5% of North American-made parts in their cars to be imported duty-free, the new agreement gradually raises the bar to 75% by 2023, which will incentivize automakers to increase the amount of North American parts they use in their cars and light trucks.
This and other USMCA provisions are “expected to ultimately raise production costs for North American automakers,” Owen Stuart predicts in “How Will the Shift from NAFTA to USMCA Affect the Auto Industry?” If those price increases do happen, Stuart says more consumers will delay new automobile purchases or buy used cars, reducing new car demand. “Given that the U.S. is already preparing to shoulder the costs of $200 billion in new tariffs on Chinese products,” Stuart writes, “a break for consumers isn’t likely anytime soon.”
Vehicle Makers are Concerned
According to a new LevaData survey, the new agreement could significantly impact the automotive supply chain. The new survey of automotive executives on the topic of the USMCA proposed tariffs on Chinese products, and their likely effects on the automotive industry, revealed that 63% of automotive executives are expecting USMCA-related production cost increases.
The survey also found that:
- 78% of automotive executives believe that the changes required by USMCA will have a positive impact on their company in the long term.
- 53% say USMCA will ultimately increase North American vehicle manufacturing and provide a net improvement for workers and consumers.
- However, many of the participants acknowledge that production costs will increase significantly, resulting in higher prices for consumers:
- 41% believe production costs will increase by 10% over the next three years
- 26% believe the increase could be 25% or more.
- 58% agree these increases will results in higher costs for consumers.
According to LevaData, increased costs are expected in the electronics component sector, where 39% of automotive executives say that USMCA will “somewhat” or “significantly” impact costs.
“The impact of these increases will likely be multiplied as these components increasingly make up a larger share of a car’s overall cost,” the company pointed out in its press release. “In what might be a signal that layoffs similar to GM’s recent cuts are coming, labor is highlighted as an area that will become more costly, with 73% stating employee payroll costs will increase or their workforce will be cut.”
Taking Steps Now
To offset the expected changes and price increases related to USMCA, the automotive sector is already working to renegotiate part supply deals in order to pass costs back to suppliers (36% of companies are doing this) and seeking out production-related cost savings (35%).
They’re also sourcing components from suppliers near North American assembly plants, with 61% of auto manufacturers predicting that suppliers situated near assembly plants will be favored “somewhat” or “significantly.” Seventy-eight percent cite finding North American suppliers or identifying alternate suppliers as a near-term priority for their supply chains.
“Auto execs aren't looking forward to higher production costs, but they consider it to be a worthwhile tradeoff,” LevaData’s Rajesh Kalidindi told Forbes. “In the year leading up to the deal, there was a lot of concern around how tariffs on Mexico or Canada could impact the industry. USMCA removes the threat of a tariff fight within North America, providing a level of certainty the industry has welcomed.”
Secondly, Kalidindi explains, the deal’s fundamental goal is to increase vehicle manufacturing in North America, and LevaData’s survey showed nearly universal agreement (89%) that this will happen. “Most of these respondents believe this offers a net gain for U.S. workers,” he continues. “While higher costs are a downside, the respondents plan to explore changes to their supply chain and supplier base to mitigate these costs.”