It’s already been a rough year for automakers — and that was before USMCA

It’s been a challenging year for the auto industry, with plunging sales, factory shutdowns and the cancellation of the auto shows that help drive sales. Now, add the July 1 start of the USMCA, the replacement for the North American Free Trade Agreement.

More formally known as the U.S.-Mexico-Canada Agreement, it’s a signature deal for President Donald Trump’s administration. The new trade agreement was hailed as a way to level the playing field and encourage the shift of manufacturing back to the U.S. But whether it will do that is far from certain.

If anything, there’s widespread concern the agreement will add billions in costs to the auto industry alone — costs automakers would have to decide whether to absorb or pass on, said Mark Wakefield, head of the automotive practice at consultancy AlixPartners.

Jan. 16, 202006:43

“A rise in prices obviously will have an impact on sales,” Wakefield said, but the alternative — swallowing higher costs — could exacerbate what he calls the “profit desert” the industry is sliding towards.

New car prices were already on the rise before USMCA went into effect, reaching a record of around $35,000 mid-spring, according to data from J.D. Power, which tracks real-time dealer transactions. A variety of factors have contributed to the surge, including Chinese import tariffs, as well as the cost of new environmental and safety regulations.

How much more USMCA might add to the cost of a vehicle is far from certain, but the Congressional Budget Office estimates the industry will pay an extra $3 billion in tariffs alone over the next 10 years before potentially higher manufacturing costs.

Even a modest price hike is worrisome to industry planners. A year ago, said one industry expert, a modest price hike might have been easier to absorb but, added Stephanie Brinley, principal auto analyst at IHS Automotive, “A lot of the public is out of work right now, so buying decisions will be under a lot of pressure this year, and probably a least part of next.”

That was echoed by various car buyers who spoke to NBC News, including specialty car enthusiast Conrad Zumhagen of Michigan. “Vehicle prices have been going up, and that’s discouraging me from buying a new car,” he explained, noting he is now more likely to turn to one of the certified pre-owned programs most manufacturers now offer.

Zumhagen isn’t the only one who might have to rethink what he buys. Detroiter Charlie Brown III bought a Mexican-made Jeep Compass earlier this year, paying $35,000 for it. “More money would have been more painful,” he said, adding he’d likely look elsewhere next time if Mexican-made vehicles started to cost much more.

There’s no question automakers saw a golden opportunity to cut costs when NAFTA went into effect a quarter-century ago. Back then, Mexico was an industry backwater, with few assembly plants and only a small network of parts and component facilities. Today, it’s one of the world’s largest automotive manufacturing centers, with scores of carmakers and major auto suppliers setting up shop.

For Mexican workers, however, not much has changed. According to AlixPartner data, workers at parts plants make around $1.50 an hour, with those on an automotive assembly line earning $2.50. Work in the U.S. varies from company to company, but even low-end parts jobs generate 10 times the pay, with assembly lines at a Ford or General Motors plant worth $70 an hour or more in pay and benefits.

Under USMCA, costs will be impacted in several ways. For one thing, there’s a higher bar for goods entering the U.S. duty-free based on where they actually were produced. And while the agreement ostensibly focuses on the U.S., Mexico and Canada, it also will have a big impact on China, which uses Mexico as a transshipment point for parts that eventually wind up in the U.S.

Meanwhile, wages will be required to jump to at least $16 an hour for 40 percent of Mexican auto workers. That, the Trump administration contends, will encourage manufacturers to bring at least some production back to the U.S.

But a loophole in the trade deal could backfire, several experts warned. Automakers will be able to offset that formula by counting the relatively well-paid workers at their big Mexican R&D and engineering operations, meaning smaller raises for fewer parts and assembly jobs.

Even so, there are signs that automakers and parts suppliers may rethink the benefits of Mexican production, especially on goods with low labor content. GM is one of several manufacturers to have brought back some parts operations from Mexico, though the numbers are so far considered insignificant.

“Supply chains don’t change overnight,” warned Wakefield. If there is a move back to the U.S., “It will happen over time,” and, for now, that means automakers will be facing higher costs they may have to pass on to consumers.

For now, the industry has until the end of this year to certify their compliance with the new rules, and may have as much as a year in which penalties would be waived if they fall short, a senior official with the United States Customs and Border Protection said during a news conference on Tuesday.

Visit the Source: https://www.nbcnews.com/business/business-news/it-s-already-been-rough-year-automakers-was-usmca-n1232641

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