New Study Highlights Significant Impact of Recently Negotiated USMCA on the North American Automotive Industry

On January 10, 2019, LevaData, a supply chain AI company, released the results of its 2018 Automotive Survey based on responses from one hundred US-based auto executives. All of the individuals surveyed are senior executives of car manufacturers, car parts manufacturers or are in leadership positions in related industries.

The study was designed to gather feedback on the impact of NAFTA2 or as it has been renamed, the USMCA (US Mexico Canada Agreement), on the North American automotive industry. This industry is of major importance to the economies of three countries that are signatories to this agreement, and specifically to several U.S states (i.e. Michigan, Ohio, Kentucky, Tennessee) and the province of Ontario in Canada.

It should be pointed out that the USMCA has not been approved by the U.S. Congress. Based on the battle over President Trump’s border wall, this may suggest that some sections of the Agreement may be revised before it takes effect. Assuming that the essential structure of the agreement remains in place, here are some insights on how it will shape the industry in the coming years.

Impact of USMCA on North American Vehicle Production

Fifty-three percent of the respondents believe the updated trade past will result in increasing North American vehicle production, providing a net improvement for consumers and workers; only 5% are predicting decreasing North American vehicle production over the long term. Sixty-three percent of the respondents predict that vehicle production costs will increase.

Thirty-three percent of the respondents predict that USMCA will increase production costs by 5% or less; sixty-seven percent expect costs to rise by more than 5% with twelve percent expecting increases of 50% or more.

Impact of USMCA on Consumer Demand

Since consumer demand is often correlated with price, the auto executives were asked to forecast the impact of USMCA on car prices. Fifty-eight percent expect car prices to rise due to higher material costs. When asked to provide their insights on how USMCA will affect the automotive manufacturing workforce, 41% predicted that employee compensation will rise and 33% forecast that this size of the workforce will be reduced.

These higher costs are expected to have a big impact on the demand for new cars. Only 8% of the respondents expect demand to remain the same. Thirty-three percent expect demand to decrease across the board; twenty-six percent expect the decrease in demand will be temporary while 28% expect it will have an impact on specific models and manufacturers. Thirty percent of the respondents expressed a concern about the impact of the trade tariffs on imports from China such as electronic components.

Automotive and car parts manufacturers have specific plans to try to mitigate production cost increases:

- 36% plan to renegotiate with car parts suppliers and seek to pass on costs to them

- 33% plan to raise finished goods costs and pass them on to consumers

- 22% will change product mix to make less expensive cars

- 18% will move production facilities

- 35% will look for production cost savings

- 28% will look for cost savings in other areas

Only 25% plan to absorb the higher costs as lost margin.

During the negotiation process, much was made of the requirement of Mexican companies to raise the compensation of their auto workers. This begs the question as to whether this will result in the shifting of any auto worker jobs from Mexico to the USA. Twenty-two percent of this US-based group of executives believe that this wage increase will have a significant impact on job migration. Thirty-one percent predict that these changes will also have a significant impact on their supply chains.

North American Automotive Supply Chains

As they prepare for the approval of the USMCA, this is how these executives ranked their supply chain priorities:

- 53% - achieving supply chain cost reductions

- 41% - identifying North American suppliers

- 37% - identifying alternate supply

- 32% - obtaining assurance of supply

- 32% - pursuing limits on cost increases

- 21% - pursuing overall supply chain efficiencies

- 12% - exploring new locations for assembly plants or other infrastructure

Asked how their supply chains will operate post-USMCA implementation, 40% expect their supply chain to run about the same while 35% expect it to run more smoothly and 25% expect it will run less smoothly. Over 61% expect one of the biggest changes to be the sourcing of suppliers close to their assemble plants.

Personal Assessments of the Impacts of USMCA

These answers are very revealing. Thirty-seven percent are neutral. They believe that USMCA will offer some improvements for workers, but they will be offset by trade-offs. Twenty-one percent are negative; they have significant reservations about its impact on the automotive industry. Twenty-three percent of the respondents are very supportive of the trade deal; they don’t love it, but it is better than the threat of tariffs. Only 19% are very supportive and believe that in the long term, USMCA will be better for the auto industry in North America.

Overall, almost 78% of the one hundred auto executives surveyed are positive about the impacts of USMCA. While the majority are largely optimistic, they acknowledge that there will be drawbacks, mostly around production costs. There was a 50/50 split on how the impact of trade tariffs with the Chinese will play out over time. Over 90% of the respondents expect to meet this initial 2020 and full 2023 USMCA compliance thresholds.

Take-Aways for the Freight Transportation Industry

The increase in wages for Mexican automotive workers is expected to shift some jobs to the USA. This should boost car production in America. On the other hand, higher prices, a result of higher costs, is expected to dampen demand for new cars. Some expect the decrease in demand will be temporary and that the agreement should be a net positive for auto freight volumes.

To mitigate higher costs, auto manufacturers will be looking for suppliers that are close to their assemble plants; truckers should expect to see shorter lengths of haul. They should also expect to face some challenging freight rate negotiations.

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