In the wake of the U.S. House of Representatives passing the United States-Mexico-Canada Agreement, or USMCA, this past December, AI company LevaData revisited some of the findings of its survey from last January showing that 78% of automotive executives foresee a positive long-term impact of the agreement.
As the saying goes, however, no pain, no gain. Forty-one percent believe production costs could increase by 10% over the next three years, and 58% say those increases could mean higher costs for consumers.
LevaData founder and chief executive officer Rajesh Kalidindi on Dec. 23 provided an update to Auto Remarketing, saying in an interview that almost 40% of the cost of a car comes from electronic components. Kalidindi said the USMCA will bring higher costs at the components level.
The importance of components
Thirty-nine percent of those surveyed said USMCA could somewhat or significantly impact costs in the area of components. The impact of these increases could become even greater as these components continue to comprise a greater share of a car’s overall cost, according to LevaData.
Kalidindi said a possible upcoming trade deal with China could ease some of the burden caused by the USMCA along with a proposed tariff on $200 billion of Chinese goods.
“The impact of both of those together is fairly significant,” he said.
He added, “We’re all hoping that … the current indications of the initial trade deal with China, plus … whatever may follow after that will at least take some of the additional burden expected on the auto industry, because the auto industry buys a lot of electronics from China to bring it in and assemble it in North American facilities.”
Kalidindi continued, “So if that trade deal goes through, then we can expect some relief, partially on those electronic costs.”
Regarding the proposed tariff, 30% of the auto executives surveyed said they were concerned about the possible impact of the tariff on their company. Nine percent expressed concern about USMCA’s impact on their company.
For its study, LevaData surveyed automotive executives, which include representatives from the manager level to C-suite, according to a representative from Bospar, an agency representing LevaData.
Of the 100 responding executives, 18 worked for auto manufacturers, 20 worked for manufacturers of supply components or parts, 14 were from companies that provided professional services to automakers, and 48 provided other products or services.
Fifty-three percent of those 100 U.S.-based automotive executives feel USMCA will eventually increase North American vehicle manufacturing and result in a net improvement for workers and consumers.
In addition to the positive impact 78% of survey respondents believe will take place as a result of the USMCA, “the second big piece” according to Kalidindi is that auto companies will have to start “building a much stronger ecosystem” in North America, he said.
That includes “getting new suppliers to set up shop in North America to get past the USMCA rules that are coming in,” he said.
That means some cost impact in the short term, Kalidindi said. But as companies gain efficiencies over a longer period of time, that could mean lower costs, he said.
Other results from the study: Forty-one percent believe production costs will increase by 10% over the next three years as a result of USMCA.
Twenty-six percent believe the increase could be 25% or more.
LevaData said that the survey highlighted labor as an area that could become more costly, stating that it might be a sign that “layoffs similar to GM’s recent cuts are coming.”
Seventy-three percent of survey participants said employee payroll costs will increase or their workforce will be cut.
Auto supply chain could see big changes
LevaData said auto executives will aggressively seek supply chain savings to reduce the impact of higher production costs. Thirty-six percent of survey participants said they planned to renegotiate parts supply deals to pass costs to suppliers. Thirty-five percent said they will seek out cost savings in the production process.
For auto manufacturers, pressure to source components from suppliers near North American assembly plants is a main concern. Sixty-one percent see suppliers near assembly plants being favored somewhat or significantly.
For 78% of survey respondents, finding North American suppliers or identifying alternate suppliers is a near-term priority for their supply chain.
With all of the challenges that the auto industry could face because of USMCA, 53% of respondents feel the agreement in the end will boost North American vehicle manufacturing and provide a net improvement for workers and consumers.
But the other 47% of respondents were concerned about the pain and less excited about the industry’s prospects for gain under USMCA. Twenty-three percent said it would increase North American vehicle production, which would be offset by higher costs for consumers. Thirteen percent said it would increase North American vehicle production, with additional production in Mexico and less in the United States. Six percent said higher costs would make North America less competitive in the auto industry over the long term, and 5% said USMCA would decrease North American vehicle production over the long term.
Kalidindi concluded the interview with Auto Remarketing by stating that with the USMCA, the possible China trade deal, and commodity price changes that take place during times of volatility, “it’s clear that this industry is going to be challenged in many different ways and especially from a margin basis going forward in the near future.”
In a news release accompanying the study, Kalidindi said USMCA, along with the possible tariffs on Chinese goods and concerns about Chinese tech component security will be major concerns for the auto industry in the near future.
“Auto makers will require a better upstream assessment of geopolitical risk considerations going forward,” he said in the release.
He added, “Knowing where tariffs might be applied and how they could impact cost and supply will be increasingly important.”