Auto manufacturing in Mexico, Canada, or outside the US is under attack from the Trump Administration given his rhetoric against international businesses. In what appears to be a chaotic transition thus far since the ineptly run, failed, Clinton Democrat campaign, populist Trump Donald Trump has aid that a border tax would be put in place for imported vehicles. However, the tax has never been quantified, 35% was originally Trump nit-twitted. Now Mexican goods are apparently targeted at 20% per Trump. Furthermore, NAFTA could be at risk. This has huge implications for the U.S. and the global auto industry.
The U.S. accounts for two thirds of North American vehicle production, but there are significant investment plans and decisions in place at major auto makers to re-source capacity from Asia and Europe to Mexico, according to consultancy LMC. These are now under a Trump assault but are nonetheless expected to bring Mexican auto production from 19% of NAFTA today to 26% in 2020, no matter how bellicose Trump is.
While minor sourcing changes to the US have been announced after the U.S. election by several manufacturers, further production shifts from Mexico, Canada or elsewhere, to the US are possible.
“We expect manufacturers to continue to publicly announce investment plans in the US – even if they are not directly linked to the election,” says LMC.
However, without sizable investments in plants in the US, it appears to be virtually impossible to add more than an additional 500,000 units of volume from Mexico – or elsewhere. LMC says the creation of new capacity in the U.S. would likely result in the closure of existing plants in Mexico, or running them severely underutilized. Either, of course, would be expensive to automakers, impacting profitability and have potentially negative effects for suppliers. None of these appear to have impeded on the “thinking” of Trump.
The possibility for making vehicles manufactured within NAFTA, but outside the US, can affect vehicle sourcing and the future N.A. production mix and vehicle decisions. The problem is that many are already in process in what is a long lead industry. Until specific policy is detailed, uncertainty is high as the industry plans – where automakers work under capital intensive and long business cycles as any high school economy student knows.
LMC says that “aversion to policy risk, and to the threat of negative publicity has become a significant consideration for planners.” No kidding. How that works out, and how long the Trump Administration lasts remains to be seen.
LMC’s baseline forecast for U.S. Light Vehicle demand during the next few years is 17.5-17.6-million-units. Given many variables and the Trump policy uncertainty – if it can be called policy, not Nit Twitting Trump – there are forecast scenarios that support both upside and downside volume expectations.
- Upside +300-500,000 – Trump’s fiscal stimulus package is substantial, with U.S. $1 trillion worth of personal income and corporate tax cuts, and a U.S. $250 billion public infrastructure investment plan. A less protectionist stance is taken.
- Downside -400-600,000 – Trump takes a highly protectionist and isolationist stance, does not implement a significant fiscal stimulus package and proceeds with immigration curbs and deportations that result in substantial labor force declines. Against this backdrop of heightened uncertainty, the US and global economies are badly shaken.
- Even with concessions and new US investment, Ford’s presence grows with Focus shift to Hermosillo from Michigan Assembly.
- GM mix shifts to Mexico with Cruze/Equinox/Terrain output relocation.
- FCA declines with re-sourcing both inside and outside NAFTA, but still over 10% Mexico mix.
- Toyota’s new San Luis Potosi plant is planned to open in 2019, but could be under pressure.
- VW increases Mexico production on new Audi San Jose Chiapa plant along with LWB Tiguan production in Puebla.
- BMW’s mix from Mexico approaches 20% with new San Luis Potosi plant to produce 3 Series and derivatives.