January 10, 2019

Automotive supply chain braces for change

USMCA will yield long-term gains, but short-term cost increases will shift supply chain landscape, company survey shows.

By Victoria Kickham

Automotive industry executives are bracing for changes to their supply chains in light of the newly negotiated United States Mexico Canada Agreement (USMCA), according to a survey from cloud-based cost-management solutions provider LevaData, released today.

Most of the 100 auto-industry executives surveyed said the USMCA will have a positive long-term effect on their companies, but they also said they expect cost increases in the short term, which will lead to higher costs for consumers.

"These findings were generally in the direction of what we expected," said Rajesh Kalidindi, founder and CEO of LevaData. "[Auto industry executives] see the benefits of increasing production in the U.S., but they were also very clear they felt it would have some near-term drawbacks related to the cost impact."

Nearly 80 percent of survey respondents said they expect the USMCA to benefit their companies in the long term, with more than half saying it will ultimately increase North American vehicle manufacturing and provide a net improvement for workers and consumers. On the flip side, 41 percent of respondents said they expect production costs to increase by 10 percent over the next three years due to the USMCA while 26 percent said costs could increase by 25 percent or more in that timeframe. Nearly 60 percent said the increases will result in higher costs for consumers, according to LevaData.

Combined with other economic concerns—including the China trade war—the issue has the potential to create big changes in the automotive supply chain, Kalidindi added. Survey respondents pointed to rising electronic components costs as well as increasing payroll costs resulting from sourcing and labor requirements of the USMCA.

"It's kind of a triple whammy with labor, material costs and what's going on with China," Kalidindi explains. "[All of this] is squarely impacting the automotive sector."

Auto companies will look to their supply chains for ways to alleviate the problems, Kalidindi explains. The survey showed that 36 percent of respondents plan to renegotiate part supply deals to pass costs on to suppliers while 35 percent will look for cost savings in their production process. In addition, many said they will see a shift in their supply base as a result of the USMCA: Nearly 80 percent of respondents cited finding North American suppliers or identifying alternate suppliers as a near-term priority, the survey showed.

Kalidindi says the short-term impacts of the trade situation will be met with "a lot of investment and decision-making" that will pave the way toward a more efficient supply chain.

"These are things that will take time to implement," he says. "From a long-term standpoint, based on how companies adjust their supply base [and] work on developing that ecosystem ... [they will] drive more efficiencies and drive better sourcing decisions."

LevaData's survey of 100 U.S.-based automotive executives was conducted online by Propeller Insights in December of 2018.

The USMCA is an update to the North American Free Trade Agreement. It was signed by leaders of the United States, Canada and Mexico on November 30 and now awaits legislative approval in each country. It could take effect as early as January 2020.

About the Author

Victoria Kickham
Senior Editor
Victoria Kickham started her career as a newspaper reporter in the Boston area before moving into B2B journalism. She has covered manufacturing, distribution and supply chain issues for a variety of publications in the industrial and electronics sectors, and now writes about everything from forklift batteries to omnichannel business trends for DC Velocity.

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