LevaData recently conducted a survey among executives at auto manufacturers and suppliers on the US-Mexico-Canada Agreement (USMCA) and its expected impact. An acknowledgement that production costs will increase was expected, but we were surprised by the projected size of the increase and the fact that the industry still broadly supports the agreement.
In addition to the recap below, here are some resources you might find helpful:
- Full Report: Impact of USMCA – Perspectives from the Automotive Industry
- GlobalAutoIndustry Podcast: How USMCA Will Impact the Global Auto Supply Chain
- Forbes: Auto Execs Say USMCA Trade Pact Will Have Positive Effects
The Industry Prefers a Completed USMCA to a Possible Trade War
Auto manufacturers and suppliers aren’t excited about cost increases, but prefer it to the threat of a trade war. In the months leading up to the deal, the industry was very concerned about the potential for the Trump administration to impose tariffs on Mexico and Canada. USMCA takes the the threat of a North American tariff fight off the table, giving the market a dose of certainty.
While no one favors uncertainty, it should be noted that many respondents don’t think the President is wrong to pursue a new international trade order. Most think the long-term effects of USMCA will be positive, and half think that tariffs on Chinese goods would eventually help resolve unfair trade practices.
Downside: Higher Production Costs
55% of respondents expect cost increases between 10-20% over the next three years.
- No significant change: 16%
- 5% increase or less: 17%
- 10% increase: 41%
- 20% increase: 14%
- 50% increase: 20%
- Over 50% increase: 2%
In terms of managing these increases, respondents plan to explore changes to their supply chain and supplier base to mitigate these costs.
- 36% plan to renegotiate part supply deals
- 35% will look for for cost savings in the production process
- 33% expect to raise prices for consumers
The majority of respondents acknowledge that higher costs will have a significant impact on their workforce however:
- Payroll cost will increase: 41%
- Workforce will be reduced: 33%
- No substantive impact on labor: 26%
- As electronic components make up a growing percent of an automobile’s cost (currently averaging at 35%), the survey took a closer look at USMCA’s potential impact on this segment. 39% of the respondents expect a slight or significant increase, compared to only 3% predicting a slight or significant decrease. If tariffs on Chinese goods are enacted, costs for these components will definitely increase.
Upside: Increased Production in North America is Expected
Calmer markets may be a benefit, but the deal’s fundamental goal is to increase vehicle manufacturing in North America. An overwhelming 89% of these execs agree production in North America will increase, although 23% acknowledge these gains will be offset by higher costs.
- 53% think USMCA will increase production in North America, providing a net improvement for consumers and workers
- 23% think USMCA will increase production in North America, which will be offset by higher costs for consumers
- 13% think USMCA will increase production in North America, with the US losing some production to Mexico
Improving the Outcome of USMCA for Automakers and Suppliers
The first step for automakers will be to determine which local suppliers can provide components that were previously purchased overseas, and more broadly, how to aggressively develop a supplier ecosystem in North America. In some cases, manufacturers will have to explore moving assembly plants to meet USMCA’s high rules of origin (requiring that almost 75% of components are manufactured in North America).
Reconfiguring their supply chain to source more parts in North America is only part of the issue however. Broadening their supply base across multiple sources and locations will reduce exposure to Chinese tariffs and provide the agility needed to react quickly to other demand-shaping situations. Automakers’ ability to move supply from one location to another to offset a variety of risk factors is going to be key. Restructuring a supply chain or building an ecosystem of suppliers doesn’t happen quickly, but it’ll be important for automakers to start making those investments now to shield themselves from cost increases sparked by USMCA, as well as any number of geopolitical issues that’ll impact volatility moving forward.