As the campaigning and transitioning ends and actual governing begins, executives all along the automotive supply chain are buckling up their seat belts for what could be a bumpy ride under President Donald Trump.
Uncertainty and unpredictability abound. An account in the New York Times about January’s North American International Auto Show (NAIAS) in Detroit observed that Trump’s admonishing Twitter messaging aimed at automakers “changed the focus of the show from what new vehicles on are display to where they are made.”
It remains to be seen whether Trump’s tweets are shoot-from-the-lip bluster or soon-to-be-implemented government policy initiatives – especially as they apply to the industry’s intertwined global sourcing relationships.
His criticism of manufacturers with overseas operations and the resulting ramifications for parts distributors and retailers relying on large volumes of imported merchandise are poised to create a series of vexing challenges.
Maintaining supply chain continuity could become more difficult if the President’s oft-stated disdain for the North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP) and other international economic deals is translated into official action.
“The word is out,” said Trump at his pre-Inauguration Day press conference, that “you’re going to pay a large border tax” on vehicles produced in nations such as Mexico, China and Japan.
“Our trade deals are disasters,” he declared. “China has totally taken advantage of us. Mexico has taken advantage of the United States. It’s not going to happen anymore.”
Plans for the border wall between the U.S. and Mexico are going forward, and Trump is insisting that OEMs opt for increased domestic production. “You’ve got a lot of states in play” that offer attractive manufacturing incentives and a vast pool of Americans eager to join the workforce.
Trump’s assent to the Oval Office has further emboldened a push by Congressional Republicans to enact a comprehensive tax reform package. Efforts to lower the corporate tax rate to 20 percent are supported by the Auto Care Association, but the organization expresses concern over a provision known as the Border Adjustability Tax (BAT) “that seeks to punish businesses that import products into the U.S.”
Noting that it is “fully engaged in this issue and is working with a broad business coalition to oppose its consideration in Congress,” the Auto Care Association is urging its membership to write letters to your respective representatives and senators. “Also, please bring this issue to the attention of your finance department so they can calculate the true impact the BAT would have on your company’s bottom line.”
The association contends that the BAT, which essentially subjects imports to a new tariff by denying American firms the ability to deduct the cost of imported goods from taxable income, would be damaging to the industry:
• Companies that rely on imports for a large portion of their product lines would see their taxes skyrocket. For example, a business that imports more than 90 percent of its products would see its effective tax rate rise to at least 300 percent of its profits, thus putting it out of business.
• The tax would increase prices throughout the supply chain, ultimately impacting the end consumer who is likely to pay more for parts and components.
NAFTA and other “free and fair trade” agreements are welcomed because industry vendors “operate in a global environment and depend on an international supply chain for their success and continued U.S. growth,” according to Bill Long, president and COO of the Automotive Aftermarket Suppliers Association (AASA).
“The stability of the North American market has been particularly beneficial to suppliers,” Long told Aftermarket Business World, “heavily contributing to the growth of U.S. jobs and providing for investment throughout the country.”
AASA’s parent organization, the Motor & Equipment Manufacturers Association (MEMA), “has already reached out to the Trump Administration to address the critical issues facing U.S. employment, trade and the global economy, including trade with China and within North America,” Long reported.
Trumpeting key concerns
In December Steve Handschuh, MEMA’s president and CEO, sent to Trump’s transition team a detailed letter consisting of more than 1,000 words that outlines key industry issues while highlighting “MEMA’s willingness to work closely with the new Administration as it begins to consider topics such as the trade in global economy, new technologies and fuel efficiency standards.”
Encouraging a “continuing dialogue,” MEMA recommended that the Administration:
• Include vehicle suppliers and MEMA in discussions regarding the future of NAFTA.
• Support inclusion of ADAS technologies in the New Car Assessment Program.
• Provide heavy duty commercial vehicle owner-operators and fleet owners with tax incentives aimed at promoting life-saving technologies.
• Protect consumers’ choice for vehicle service and repair in the aftermarket.
• Support efforts to harmonize fuel economy and GHG emissions programs.
“We look forward to working closely with the Trump Administration to make manufacturing and the motor vehicle supplier industry stronger and more viable in the United States,” wrote Handschuh in concluding MEMA’s missive to the President.
MEMA has rolled out a weekly White House Watch emailed newsletter, a “just-the-facts look at Trump Administration decisions and actions,” for all of its affiliated memberships – including the Heavy Duty Manufacturers Association (HDMA), the Motor & Equipment Remanufacturers Association (MERA) and the Original Equipment Suppliers Association (OESA) along with AASA.
Holding its inaugural meeting in December, AASA has established a Financial Executives Council (FEC) aimed at aftermarket CFOs, vice presidents, finance directors, controllers and similar positions. In January the FEC conducted a “Taxes and NAFTA” webinar, and future educational programs will be offered on an ongoing basis.
Cross-border commerce
Addressing the possible repercussions of potential Trump-induced global trade restrictions, Skip Potter, executive director of the National Automotive Service Task Force (NASTF), noted that unfortunate consequences could ensue “if any new taxes or tariffs were so onerous that OEMs exporting to the U.S. would leave the marketplace; that would change the agreements to provide service information” for repairers.
“That would have an impact on technicians,” Potter pointed out, referring to the previous domestic demise of Sweden’s Saab and Japan’s Isuzu car models and the subsequent arrangements that had to be negotiated to ensure a continued flow of repair details. “That would concern us.”
An annual “American-Made Index” from cars.com that tabulates the most-American vehicles finds that just eight models meet its standards – the percentage of parts from the U.S. or Canada, assembly line locations and total sales – for deeming a vehicle as being domestically produced. Ironically it is Japan’s Toyota Camry that has again topped the list for the second consecutive year and sixth time overall. And the eight models making 2016’s cut are down from the nearly 30 nameplates indentified in 2011.
“The reason for the shrinking list continues to be the globalization of today’s automakers,” says Patrick Olsen, the website’s editor-in-chief. “While building the same car for all markets is better for an automaker’s bottom line, tracking just how American a car is has become more difficult because so few meet the criteria for our index.”
According to statistics compiled by the Center for Automotive Research (CAR), in 2015 under NAFTA the total all-industry U.S. Foreign Direct Investment (FDI) into Canada was $353 billion. Canadian FDI into the U. S. amounted to $269 billion. The U.S. FDI into Mexico was $93 billion, and the Mexican FDI into the U.S. was $17 billion.
• 40 percent of U.S. light vehicles exported in 2015 were shipped to NAFTA partners.
• 50 percent of U.S. light vehicles imported were shipped from NAFTA partners.
• 75 percent of the value of U.S. automotive parts exports were shipped to NAFTA partners in 2015, split roughly evenly between Canada and Mexico.
• 51 percent of the value of U.S. automotive parts imports came from NAFTA partners in 2015; U.S. parts imports from Mexico represented three-quarters of these imports.
CAR’s research has additionally concluded that other countries are also making significant investments into the NAFTA nations.
“Nearly 90 percent of the new Mexican light vehicle assembly plant investments announced since 2009 are for assembly plants of Japanese and European automakers,” according to CAR’s analysis.
“These global companies are transitioning production from their home regions to North America, and will increasingly rely on existing North American supply chains, given the logistical disadvantage of sourcing parts and components from overseas,” said the CAR report. “Therefore, even new assembly capacity in Mexico will benefit auto suppliers located in the United States, and these supplier companies will continue to gain from a larger North American light vehicle production base.”
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