What is fast becoming a new norm for business risk is that of a direct public attack via a Twitter “tweet” from U.S. President Elect Donald Trump. Before formally taking office on January 20th, Mr. Trump has already attacked corporations such as United Technologies for presumably outsourcing U.S. jobs to Mexico. Other public confrontations have involved Boeing and Northup Grumman for perceived excessive development costs related to new U.S. government aircraft.
Today, this Presidential social media campaign took on direct industry supply chain implications.
In a series of Twitter postings, the President Elect took direct aim at General Motors regarding the Chevrolet Cruze model. Mr. Trump accused GM of importing this vehicle from Mexico to U.S. dealers without having to pay U.S. import duties. GM quickly responded that the bulk of the Cruze was produced in a plant in Lordstown, Ohio.
Trump’s other automotive industry target has been Ford Motor, who had previously announced plans last February to build and staff a new manufacturing facility in Mexico to produce smaller vehicles. An editorial at the time published by The Wall Street Journal reflected that Ford’s strategic sourcing moves were indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raised direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates were indicated as being one-fifth that of unionized workers in the U.S.
Today, Ford suddenly scrapped its plans to build the previously announced $1.6 billion small car factory in Mexico in favor of a modified plan that would share production among existing plants in the U.S. and Mexico. Ford’s CEO Mark Fields took to the business airwaves to declare a new meeting of the minds regarding the incoming POTUS to include a planned $700 million incremental investment in the Flat Rock Michigan assembly plant.
We call reader attention to a CNBC business network report which we believe provides far more insight as to what is really at-stake in this developing direct public confrontation of U.S. auto manufacturers. That insight involves the current automotive value-chain of parts and component sourcing.
The CNBC report notes that under the existing North America Free Trade Agreement (NAFTA) the parts components that make-up a finished automobile and truck are increasingly sourced in Mexico. In 2015 alone, 60 percent of the $5 billion in direct foreign investment associated with Mexico’s automotive industry sector was associated with parts and component manufacturing. As we have previously noted on this blog, Mexico’s direct labor costs averaging in some cases $2.50 per hour are a compelling attraction for parts producers, especially when various global OEM producers demand that a contiguous component supply chain be developed to support both Mexican and other North American production needs.
In 2014, we called Supply Chain Matters reader attention to the then prevalent trend that for the automotive industry, Mexico was fast becoming a North America production and global export production hub. We echoed that global automotive brands BMW, Honda, Kia, Mazda, Nissan, Volkswagen, Nissan, and others had announced strategic Mexican production sourcing decisions that amounted to billions of dollars of investment. This was beyond U.S. automotive branded companies, reflecting that Mexico would soon become an alternative global automotive manufacturing hub for smaller, lower-margin vehicle line-ups.
The CNBC report cites U.S. trade data for the first 10 months of 2016 indicating that “parts imports from Mexico totaled $89.6 billion, dwarfing the next biggest import nations, Canada with $54 billion and Japan, at $44 billion. While vehicles were the main imports from Canada and Japan, more than half- $46.8 billion of the automotive-related imports from Mexico- were vehicle parts in that 10-month period. U.S. government data show that car parts imports into the U.S. nearly doubled in the past five years.”
It would appear to this blog, that Mr. Trump has gathered advisors who appear very knowledgeable of automotive supply chain sourcing strategies particularly as it relates to current NAFTA agreements. The Trump campaign promises to thwart the exodus of U.S. jobs has obviously already begun, and the stakes are threatened import tariffs involving imported auto parts originating from Mexico and Canada. Thus far, it would appear that Ford has been willing to meet the incoming Administration halfway with new concessions. Perhaps, GM and others will follow in a meeting of minds or the Republican dominated Congress will act on Trump’s threatened NAFTA agenda.
With the first direct skirmishes involving public confrontation underway and other U.S. based industry supply chains should be prepared for an environment of changing assumptions related to the landed cost of component sourcing.
Where all of this give, and take ultimately lands is very much uncertain especially in the new tendencies toward direct confrontation. The sheer facts of dramatically different direct labor costs among Mexico and the U.S. workers remains. Worker productivity and automation are the new variants in global sourcing coupled with threatened new import tariffs or open market retaliation.
Preparation and timely detailed knowledge of component sourcing and production costs coupled with backup contingency sourcing plans are fast becoming a required capability in this evolving new era of populism and anti-global trade.
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