Foreign Automakers To Shift More Manufacturing To The U.S.

Foreign automakers have signaled that they will shift more of their manufacturing to the United States, Canada and Mexico thanks to the recent US trade deal with Canada and Mexico, reports the Wall Street Journal

Following the United States-Mexico-Canada Agreement (USMCA) or simply "Nafta 2.0" - BMW AG CEO Harald Krüger said this week from the Paris Motor Show: "We will allocate more U.S. production for the U.S. market," adding that the German automaker already sources a variety of parts in the region.

Deiter Zetsche, CEO of Daimler AG said that the new agreement might force them to move engine manufacturing to the US, where it already builds cars and SUVs at their Tuscaloosa, Alabama factory. 

The impact on foreign auto makers’ North American operations from the newly named United States-Mexico-Canada Agreement, which still has to be approved by Congress, remains unclear. But many in the auto industry see the pact as evidence of President Trump’s tough approach to trade, at a time when he is threatening new tariffs on European and Japanese auto imports.

Industry consultants say auto makers are growing increasingly nervous that more restrictions could emerge as Mr. Trump turns to trade talks with Japan and the European Union. -Wall Street Journal

"These companies are now seeing that there is an element of political risk to operating in the U.S.," said globam management consulting exec, Johan Gott.

Following the 1994 Nafta deal, automakers worldwide established supply chains based on low or no tariffs within North America - a deal with then-candidate Trump promised to dismantle upon his election after arguing that it eroded the US manufacturing base, sending jobs to Mexico where labor is cheaper.

Nafta 2.0, on the other hand, requires automakers to assemble at least 75% of a car's value in North America in order to retain duty-free status, up from 62.5% at present. On top of that, automakers must ensure that 40-45% of the vehicle is made by workers who make at least $16 an hour - a provision designed to shift work back to the US and generate more manufacturing jobs. 

The new rules will be phased in over the next two to five years, about the time it takes to develop a partially or fully revised car model. Car makers are likely to look at moving engine and transmission production first, because those parts make up roughly 30% of a car’s value and thus represent what would be a big step toward the stricter content thresholds, manufacturing consultants say. -Wall Street Journal

Moreover, annual auto imports from Canada and Mexico are to be capped at a combined 5.2 million vehicles - while just 4.1 million vehicles were sent into the US from the two countries last year. Cars which don't comply with the new pact will face a 2.5% tariff - though light trucks such as pickups are exempt from the caps. 

According to Autodata Corp, foreign-based cars made up 56% of light-vehicle sales last year, while manufacturing utilizes a significant number of parts sourced overseas - including expensive engines and transmissions. These will likely be at risk of noncompliance under Nafta 2.0 for many vehicles already made in the United States, hence the shift. 

The new trade deal will impact vehicles built in Mexico with lots of foreign parts before being shipped to the US, such as Volkswagen's Golf, Honda's Fit, and the Nissan Sentra. 

Carlos Ghosn, head of the Renault-Nissan-Mitsubishi alliance, said the new North American trade pact would spur the car-making group to invest more in both the U.S. and Mexico, but didn’t provide details. Honda and Volkswagen said in separate statements that they are still analyzing the potential impact of the deal on their local operations.

Mazda Motor Corp. , which relies on Japan for engines and transmissions, would also struggle to meet the higher content requirements on its Mexico-built Mazda3 compact car. -Wall Street Journal

"Naturally, it will change since we haven’t reached 75%” local content," said Akira Marumoto, CEO of Mazda. "Components that have to be made within the Nafta region will increase."

US automakers, GM, Ford and Fiat Chrysler don't expect to suffer significant impacts under Nafta 2.0 since most of the vehicles they make and sell in the US are likely to meet the local content and wage requirements. That said, some cars such as Fiat Chrysler's Mexican-made Fiat 500 may require a few manufacturing changes, as its transmissions are imported from Germany, Italy or Japan depending on the model. 

One has to wonder how quickly we will see the increased manufacturing costs translate to the average MSRP.