What Auto Companies are at Risk Under Trump?

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 Forecast

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.

About Ken Zino

Ken Zino is an auto industry veteran with global experience in print and electronic media. He has auto testing, marketing, public relations and communications expertise garnered while working in Asia, Europe and the U.S.
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3 Responses to What Auto Companies are at Risk Under Trump?

  1. Mary Barra says:

    We had a very constructive and wide-ranging discussion about how we can work together on policies that support a strong and competitive economy and auto industry, one that supports the environment and safety. The U.S. is our home market and we are eager to come together to reinvigorate U.S. manufacturing. We all want a vibrant U.S. manufacturing base that is competitive globally and that grows jobs. It’s good for our employees, our dealers, our suppliers and our customers. (Ms Barra is the CEO of General Motors – editor)

  2. Autocrat says:

    Senator Stabenow’s (D-MI) Bring Jobs Home Act of 2017:

    Creates a new tax cut to provide an incentive for U.S. companies to move jobs and business activity from another country back to America. Specifically, her initiative will allow U.S. companies to qualify for a tax credit equal to 20% of the cost associated with bringing jobs and business activity back to the United States. The company will be able to apply the 20% tax credit against their income tax.

    Ends a tax deduction for U.S. companies that outsource jobs and business activity. Right now, the cost of moving personnel and components of a company to a new location is defined as a business expense that qualifies for a tax deduction. Senator Stabenow’s legislation will keep this deduction in place for U.S. companies that bring jobs and business activity back home but businesses would no longer be able to get a tax benefit for shipping jobs overseas.

  3. Sander Levin, Harley Shaiken says:

    The long-overdue renegotiation of the North American Free Trade Agreement (NAFTA) was driven into a wall by President Trump’s heated rhetoric on tariffs to build that wall. If such a discussion resumes, a fundamental question remains: Does the President who encouraged auto jobs to flow to southern states for lower wages during the campaign realize that labor standards are at the core of the problem with NAFTA?

    When NAFTA was debated in late 1993, most Democrats in the Congress opposed it because they felt that worker rights and environmental standards were wholly inadequate. They were right.

    Now we have a highly unbalanced trading relationship with Mexico and job loss that has taken a terrible human toll and shaken the core of manufacturing communities throughout our nation. The trade deficit stands at a record $110 billion and the Economic Policy Institute indicates the U.S. lost 850,000 jobs between 1993 and 2013.

    What happened? For investors and corporations, Mexico offered the guarantees of Ohio; while for Mexican workers, labor rights began to resemble Honduras. These poor working conditions and low wages became a magnet for state-of-the-art manufacturing.

    Observers generally treat low wages in Mexico as if they are a natural part of the environment. They’re not. They reflect government policy to attract investment by keeping wages low. A labor relations system that can be both convoluted and corrupt makes it virtually impossible to form independent unions in the export sector. The so-called protection agreements are shams, not negotiated by workers. The Mexican government and employers dominate the labor board structure, which oversees and enforces labor laws.

    This dysfunctional system has shattered the link between rising productivity and wages. This means that workers produce more and earn less. Mexican manufacturing productivity increased 80 percent, while real compensation—wages and benefits–slid 20 percent between 1994 and 2011. Not only did most gains bypass Mexican workers, but in a highly integrated market U.S. workers feel the pain across the economy. They lose twice: first, production shifts to Mexico attracted by depressed labor costs; second, workers become willing to accept far lower wages to be “competitive”.

    Consider the auto industry, the flagship manufacturing industry across North America. The Mexican auto industry exports 80 percent of its output of which 86 percent is destined for the U.S. and Canada. If high productivity translated into higher wages in Mexico, the result would be a virtuous cycle of more purchasing power, stronger economic growth, and more imports from the U.S.

    In contrast, depressed pay has become the “comparative advantage”. Mexican autoworker compensation is 14 percent of their unionized U.S. counterparts and auto parts workers earn even less–$2.40 an hour. Automation is not the driving force; its depressed wages and working conditions. Auto sector employment in Mexico rose by 45 percent between 2007 and 2015, adding more than 200,000 hourly jobs, and auto output is projected to double to more than 5 million vehicles annually between 2010-2020, which could include larger vehicles now produced in the U.S.

    While many dimensions of NAFTA need to be updated, including investment provisions, rules of origin and environmental protections, a demonstrated reform of core labor rights–the ability to form independent unions and bargain collectively–is absolutely essential. “Demonstrated” means not simply better language, but meaningful changes on the ground as the precondition for the agreement being implemented. And enforcement provisions as part of the re-negotiation that allow us to prevent any backsliding.

    We strongly believe in the benefits of trade, competitiveness, and engaging the global economy. Competitiveness, however, needs to be based on innovation, productivity, and quality, not who has the fewest rights. We need rules for trade ensuring these gains translate into broadly shared prosperity on both sides of the border. Trade rules that channel the benefits to the top squander the promise of trade and leave dislocation and stagnant wages or poverty in their wake.

    If President Trump wants to put workers first, he must put worker rights first in any future negotiations on NAFTA.

    Rep. Sander Levin represents Michigan’s 9th District and is a senior Member of the Ways and Means Committee with jurisdiction over trade. Harley Shaiken is a Professor at the University of California, Berkeley, specializing in labor and the global economy.

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