With Mexico having become a globally important automotive producer since the signing of NAFTA in the early 90’s, quite a lot has changed.  Surely, with increased tariff threats driving production to higher-cost locations (US and Canada, if they remain in a continental agreement structure) the ultimate cost to the consumer will rise as well.

The story below by Paul Eisenstein describes the impacts to automakers about the much-reviewed changes being discussed and negotiated for NAFTA. The current view in protectionist circles about trade agreements generally are classic debates that are framed by too many as one about winners and losers. The temptation to do that is alluring but the interlocking issues and short-term and long-term results require far more complex analytics. As is the case with most complicated things, the debate is generally confused by ignoring basic facts and quite different assumptions and priorities.

The looming trade agreement changes in North America reflect the understandable American desire for supporting increased manufacturing at home. As countries craft new or refined multilateral and bilateral trade agreements, of course it’s reasonable to desire more manufacturing in the home location. This is not an issue that is unique to the United States. By some measure, this issue may be less important to the United States then other countries, who may rely far more on manufacturing to support economic growth. This will be clearly true for less-developed countries that are positioned to compete well for producing “commodity” products – in the case of the automotive industry products such as plastic door panels, dashboard components and rubber engine parts, like hoses.

These political discussions have very real impacts to the structural shape of the global industry and very real consequences to corporate competitiveness and practical supply chain planning and management. They also have very real consequences to a range of other areas including: 1) long-term economic development, 2) the potential for growth at and around certain seaports and airports as traditional and next-generation logistics centers, and 3) the pace of overall technological innovation and adoption in key sectors.

What’s missing in this discussion are critical considerations around the following key factors. At least using the automotive industry as an example here are some of those considerations:

A mid-term and long-term view about trade is a system – Innovation and consumer demand are changing so rapidly that it’s simply not acceptable to portray the future in today’s context. If we’re thinking about anything longer than a 2 to 3 year period, we need to insert both current and future considerations. There are multiple components to a full-view trade and product manufacturing “system”, if you short-circuit the natural course of the free-market system there will be consequences. For the system to work well in an economy that wants to include selling products to expanding global markets, trade should assume that production is split among partners, where each does what it does best (and most efficiently). In the US for example, as we consider the explosive changes occurring today in the automotive supply chain, it can and will be a global leader in the technology areas that are shaping autonomy, active safety systems, connected vehicle and propulsion. The sector isn’t really the “automotive” sector any longer, it’s the “mobility” sector, which represents the technology is literally reshaping the way that humans will move about the planet – so it’s kind of hard to understand why the much of the first-world concerns about trade is about who makes those commodity parts. Surely, the current debates are focused on supporting portions of the workforce that are not fully prepared for more advanced technology production – but in the end, that’s kind of the point. If more advanced economies don’t continue to understand and improve from the point of their advantaged position, they are simply staving-off problems for later.

Consumer costs actually do matter – By working to shift manufacturing to less efficient locations, the practical effect is that overall costs and end-user prices will rise. Causing significant price increases to final consumer cost will impact overall sales volumes and the result will be an impact to jobs, wherever they may be located. In the end, there is only so much discretionary consumer spending to go around, even though some economists may ignore this fact and assume rosy structural growth assumptions. In the automotive sector, shifting significant commodity parts production to higher-cost locations will increase the price of a vehicle, without providing a corollary increase in content or quality. Basic economics, tell us that lower levels of sales means few jobs in both advanced and aspiring production markets.

Places should focus on what they do best – With Mexico having become a globally important automotive producer since the signing of NAFTA in the early 90’s, quite a lot has changed. Surely, with increased tariff threats mandating production to higher-cost locations (US and Canada, if they remain in a continental agreement structure) the ultimate cost to the consumer will rise as well. Without question the US and Canada have a structural production cost disadvantage. With that said, those same countries also have huge advantages in research, development and production of the products that are literally redefining the future of the automotive industry. At least in the US, it is and likely will be an extremely important global center for the technology that is changing the world of human mobility. Technology development in the areas of autonomy, active safety systems, connected vehicle, and propulsion and powertrain systems are the very areas that are centered in the US, particularly in California and Michigan. Some parallel arguments can be made in other developed automotive and technology centers in Asia and in Europe.

Consequences – This editorial pointed out consequences for getting things wrong, and using the automotive sectors as an example, here are some thoughts about the impacts of looking at short-term opportunities:

  1. Long-term economic development
  • The technological revolution that is fueling the explosive change in mobility is producing huge growth metrics in software development, systems engineering, technology integration, product testing and development – and also in manufacturing of the products that are the results if this technology tidal wave. Advanced markets need to be focused on supporting this growth by creating business and physical environments and labor force skills. At present, in the US there are a very few places that are positioned to capitalize on this phenomenon.
    1. Potential for growth at and around certain seaports and airports as traditional and next-generation logistics centers
      • For example, the product areas mentioned above that are the very products that are redefining mobility are growing at much higher rates and that pace is expected to increase over the next few decades. Manufacturing is these areas produce high-value and more technologically advanced products – products that are small and light and high-value. Supply chain managers do not want for warehouses full of that kind of inventory, and instead require just-in-time deliveries. Production and quick-ship/forward deployment hubs at and near to key air cargo logistics centers are becoming increasingly essential.
      • Similarly, with exploding globalization of the automotive supply chain (read: this is increasingly about China for the next 25 years) to reduce cost and transit time and increase reliability, supply chain managers are and will be seeking production, assembly and forward deployment hubs in reasonable proximity to seaport logistics hubs.
  • Pace of overall technological innovation and adoption in key sectors
    • From GLDPartners vantage point along with the work that we’re deeply involved with in the automotive sector, it seems like the pace of technological change around mobility is unending. Our work in developing the large-scale California AutoTech Testing and Development Complex just outside of Silicon Valley in Merced County would seem to indicate that there is no end in sight for further innovation and investment – ranging from global legacy OEMs to large technology companies to start-ups.
    • We need to remember that what we’re experiencing today in terms of the global economy and supply chain activity is through the lens of an almost fairy-tale like period of economic growth. This period has lasted now a very long time now: the current economic expansion began in June 2009 — or 9 years and 4 months ago. If this one makes it to 10 years in 2019, it’ll be the longest in US history. Though with variations globally, consumer spending is very high and this has fueled a delight for technology products. This dynamic has also allowed a buoyancy that has provided a rock-solid foundation for the advancements now occurring in the world mobility. We do not believe that this will continue unimpeded and the reality is that a correction is expected by most economic forecasters. The important question is how will future variations in economic conditions impact the pace of spending and innovation.

 

In the end, it seems quite obvious that adjustments to trade agreements in this modern era require very thoughtful consideration – they always have but the world is just more complex, more interconnected and frankly more interdependent than ever before. In the automotive sector, what may seem on the face of it a reasonable reaction to the loss of manufacturing jobs generally may well be the trigger protectionist actions which will tamp down overall growth, reduce foreign market expansion and overall innovation.

 

NBC: With No NAFTA deal in sight, Wall Street, automakers and car buyers are left to spin their wheels.

Any increase in labor, raw material, or transportation means higher costs that “eventually, will be paid by American consumers,” says one industry analyst.
by Paul A. Eisenstein /
Image: U.S. President Donald Trump shake hands with Mexico's Economy Minister Ildefonso Guajardo Villarreal

President Donald Trump shakes hands with Mexico’s Economy Minister Ildefonso Guajardo Villarreal watched by Mexico’s Foreign Minister Luis Videgaray Caso, center, as he arrives to speak on trade in the Oval Office of the White House in Washington on Aug. 27, 2018.Mandel Ngan / AFP – Getty Images

President Donald Trump’s initial trade deal with Mexico is raising concerns among automotive manufacturers and industry analysts who fear the cost of building cars, especially in Mexico, will surge. And, at a time when the U.S. new car market is already sliding after years of growth, that could either lead to a further slump in demand — or force manufacturers to absorb higher costs at the expense of profitability.

“Inevitably, this is going to be driving up costs,” said Joe Phillippi, a long-time Wall Street auto analyst who now runs AutoTrends Consulting. “You’re going to have to eat any increase as a manufacturer if you want to keep that merry-go-round going.”

Mexico is one of the largest of America’s trade partners, and the current North American Free Trade Agreement covers a wide range of goods and services. The same will be true when it comes to any new trade agreement, but autos make up a significant part of that cross-border trade and, if anything, have become even more important since NAFTA was originally put into effect on Jan. 1, 1994.
Back then, Mexico was an automotive backwater, largely focused on producing low-cost parts in a region just south of the border known as the maquiladoras. But over the last five years, Mexico has seen a surge in overall production, with more than a dozen manufacturers setting up assembly plants there, taking advantage not only of NAFTA but of the free trade agreements it has negotiated with a wide range of other countries.

Critics, including the United Auto Workers union (UAW), have complained loudly, insisting Mexico is stealing U.S. jobs, in part, by holding down the wages of its autoworkers. And that is something the White House claims the new deal will address. It also targets the broader questions of where car parts come from beyond the boundaries of North America.

The new deal would require that 75 percent of the value of the parts that go into a car covered by the agreement be made somewhere in North America, and that at least 40 percent of the total car be built in plants where workers are paid at least $16 an hour. In the U.S., that could affect a small number of plants producing low-value parts, though most workers here earn significantly more. In Mexico, however, the boom in automotive manufacturing hasn’t translated into a big payoff for employees. Those on the line at the new Audi plant reportedly earn as little as $2.25 an hour.

Exactly how much car prices will increase from the proposed agreement with Mexico will likely vary widely, according to industry analysts and insiders. The U.S. Automotive Policy Council, which represents the Detroit Big Three, said it would need to conduct “further study” as more details are released about the deal, and the industry still needs to know if and how Canada might fit into any replacement for NAFTA.

U.S.-Canada talks remain stalled, with Canadian Prime Minister Justin Trudeau telling reporters on Tuesday there are “a number of things we absolutely must see in a renegotiated NAFTA.” Trump has said he may move ahead with a U.S.-Mexican deal that excludes Canada.

Even if Canada does come on board, automakers are worried, especially as they watch U.S. car sales tumble. New car sales set a record of around 17.4 million in 2016, marking a long recovery from the depths of the Great Recession. But demand slid by around 2 percent last year and has continued downward.

“The price of labor is a critical part of the cost of the parts that go into your car — everything from axles to gears,” he said.  Complicating matters, automakers have already been slammed by Trump’s earlier decision to raise tariffs on imported aluminum and steel. By some estimates, that has added several hundred dollars to the price of even a product like the Toyota Camry assembled in Kentucky.

Manufacturers frequently compensate for fixed added costs by finding efficiencies, perhaps increasing automation. But they can only go so far and those increases “eventually, will be paid by American consumers,” said Michelle Krebs, a senior analyst with data tracking service AutoTrader.

Automakers do have the option of swallowing higher costs or, if they boost sticker prices, they could follow up with higher incentives. But both those options translate into lower earnings, analysts like Krebs and Phillippi point out.

Not everyone appears to be upset with the preliminary agreement. The UAW is betting that higher costs in Mexico could help justify bringing some auto jobs back to the U.S.

Meanwhile, Wall Street investors are trying to make sense of the ongoing NAFTA negotiations. They drove up auto shares last week following word of the Mexican agreement, but industry stock prices are now falling back, reflecting concern that if Canada doesn’t sign on, that could require an extensive makeover of a continent-wide auto parts and assembly network built up over the last quarter century.
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GLDPartners is an international investment, project development and advisory firm that specializes in revenue and infrastructure development projects at and around high-opportunity airports, seaports and strategic trade and logistics hubs. The firm also supports global manufacturers and companies with retail distribution operations with network design strategy, competitiveness analytics and facility location projects. The firm is developing research and development assets to support the global automotive sector. GLDPartners’ clients and market perspective is global and the firm is headquartered in in the US in Scottsdale, Arizona, with offices in New York, Washington DC, Chicago and in the UK.

www.gldpartners.com