Suppliers sort out Mexico options

Even though they don’t know what, if any, trade-rule changes will occur, suppliers that operate on both sides of the Rio Grande are sorting out which parts and processes could move to the United States if the Trump administration imposes high tariffs on imported goods from Mexico.
“We’re still trying to sort that out,” said Lear Corp. CEO Matt Simoncini in a conference call with Wall Street analysts to announce fourth-quarter earnings.
He said Lear could “very quickly adjust and adapt,” and he said the cost of moving would not be “dramatic.” Still, he said most components would take up to 12 months to move, or as much as 18 months for “tougher” ones.
Wild cards
Before suppliers can start moving production, there are at least two great unknowns.
1. Whether higher import barriers get approved, and how high they would be.
2. Based on those factors, how the automakers would react.
American Axle & Manufacturing Holdings CEO David Dauch said in a separate conference call this month that his company prefers to manufacture parts in “close proximity” to the automaker plants where they are used.
“The Trump administration needs to clearly articulate and communicate their policies,” Dauch said. “The OEMs need to digest that, and clearly they’ve had some discussion with them.
“And they’ve got to determine their plant-loading strategies. Once they determine their plant-loading strategies, then we clearly can determine our plant-loading strategies.”
Comments made in recent supplier conference calls suggest that companies are more likely to leave the more labor-intensive operations in Mexico, where low labor costs are proportionately a bigger advantage over U.S. manufacturing. High-tech components, and parts that could be more automated, are more likely to move to the U.S. because labor represents a smaller percentage of their value.
Delphi Automotive CFO Joseph Massaro offered similar reasoning in his conference call this month. Delphi supplies electronic systems and powertrain and active safety technology.
“There are certainly more automated-type manufacturing processes down there, which you could conceivably see coming back — or coming — to the U.S.,” Massaro said. “Some of these were never in the U.S. We’ve grown them in Mexico or started them in Mexico.”
In Lear’s case, Simoncini said higher tariffs could affect different parts in different ways, even within the same product line. Making seat covers is labor intensive, he said of Lear’s operations, so it would probably stay south of the border “even with increased taxes.”
But Mexican electronic components, the underlying seat structures and foam cushioning could probably move to the U.S., he said.
Shipping costs are another consideration, Simoncini said. Seat covers would be more likely to stay in Mexico because they stack compactly and are shipped more easily and cheaply than the underlying seat structures, he said.
Several multinational suppliers maintain that they are flexible enough to respond quickly and economically, once they know what to expect on trade rule changes.
BorgWarner CEO James Verrier told analysts that his company’s annual cross-border sales with Mexico represent about $200 million of about $9 billion in annual worldwide revenue.
“That’s a manageable situation, particularly with the flexibility of our footprint,” Verrier said of the engine and drivetrain parts supplier.
Upsetting the cart
But it is clear that uprooting Mexican factories would undo some long-standing U.S. supply chain strategies. Delphi CEO Kevin Clark noted that Delphi has been making wire harnesses in Mexico since the 1980s.
“That supply chain has developed and has been optimized to serve our customers exactly where they want to be served,” he said. “That is a product that shows up literally hours before it’s put into a car in the assembly line.
“It’s been optimized,” Clark said. “And any disruption to that, quite frankly is going to add significant cost.”
Source: Automotive News

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