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Sunday, 27 November 2016 15:44

Business as usual, for now: West Mich. automotive suppliers adopt wait-and-see approach

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Ford’s decision to keep production of its Lincoln MKC in Louisville, above, was seen by industry insiders as an olive branch to the incoming Trump administration after a contentious campaign. Ford’s decision to keep production of its Lincoln MKC in Louisville, above, was seen by industry insiders as an olive branch to the incoming Trump administration after a contentious campaign. Courtesy Photo

After one of the largest political upsets in recent history, West Michigan automotive suppliers have started assessing how a Donald Trump presidency could affect their industry. 

Trends that have driven the automakers for the past several years, including localized production and an increasingly global footprint, could be threatened under Trump’s presidency, given his promises to rewrite free trade agreements. As such, the automotive industry may have more exposure to policy decisions promised by the incoming administration compared to other industrial sectors, according to industry experts. 

Still, most suppliers interviewed for this report appear to have adopted a wait-and-see approach. 

“Mainly, as an international company, I am concerned about the isolation tendency I hear and the related resistance to free trade,” David DeBoer, CEO of Grand Rapids-based Burke Porter Group, wrote in an email to MiBiz. “However, I have faith in our political process, which has a good amount of checks and balances in the system. I’m not changing anything in our strategy or business methodology as a result of the election. Basically, it’s business as usual.”

Burke Porter, which manufactures large-scale testing and diagnostic equipment for the automotive industry and other sectors, was purchased by Hong Kong-based China Everbright Ltd. in March 2015 and operates global holdings. 

On the campaign trail, Trump frequently criticized the U.S. automotive industry, which has shifted production to lower-cost regions like Mexico in the years following the approval of the North American Free Trade Agreement, or NAFTA. Under NAFTA, manufacturers can move goods between the U.S., Canada and Mexico without tariffs.

During his first 100 days, President-elect Trump has pledged to begin the process of withdrawing the U.S. from NAFTA, which he described as “the single-worst trade deal ever” during the first presidential candidate debate in September. He also pledged to back out of talks surrounding the proposed Trans-Pacific Partnership, leading many in Washington to believe the deal to be dead in the water, according to reports.  

TWEET AND MAKE UP

Grand Haven-based GHSP, a business unit of JSJ Corp. that manufactures electronic shifting components and pumps, echoes Burke Porter’s wait-and-see attitude. President Jeff Smith believes “it’s too early to tell” the long-term implications the new administration will have on the automotive industry, noting that there’s “too much emotion wrapped around it at this point.”

Much of that emotion likely stems from Trump’s clashes with automakers, including a well-publicized kerfuffle with Dearborn-based Ford Motor Co. during and after the campaign. 

Nine days after the election, President-elect Trump announced via Twitter that he had been an instrumental voice in swaying Ford to keep a Lincoln production line in Kentucky. 

However, his social media post appears to have oversimplified matters. While Ford confirmed that it was shelving plans to move the Lincoln MKC production from Louisville to Mexico, the company pointed out that it never had any intentions of cutting jobs in Kentucky. Instead, the automaker wanted to free up more space at the facility to increase production of the popular Ford Escape, which shares the same platform as the MKC.

Most reports described the announcement as a largely symbolic act on the part of Ford to smooth relations with Trump, who shamed the automaker and its peers for shifting vehicle production to Mexico and threatened a 35-percent tariff on vehicles imported from south of the border. 

During the Los Angeles Auto Show earlier this month, Ford CEO Mark Fields said the proposed tariff  “could have a huge impact on the economy,” according to reports. 

BACKPEDDLING ON FREE TRADE 

Despite the arguments from the incoming Trump administration in favor of abolishing NAFTA, industry experts say tearing up or significantly altering the trade deal could have long-term impacts throughout the entire automotive supply chain. 

“When you look at the NAFTA region and where assembly operations are right now for the global automakers, they’ve been put in place based on the NAFTA rules of order,” said Dave Andrea, executive vice president of research for the Center for Automotive Research (CAR) in Ann Arbor. “To upend that would definitely cause the recalculation of the economics of all those capital investments.”

Andrea notes that altering NAFTA would send “ripple effects” throughout the entire supply chain, including everything from container security protocols to potentially closing the open borders that allow for just-in-time delivery practices — a strategy the automotive industry relies on to cut down on inventory costs. 

Despite the uncertainty, global automakers are largely committed to their assembly plants in Mexico and most likely won’t walk back any of those investments as a result of policies from the new administration, Andrea said. 

However, it’s a different story for suppliers, he said. 

“The biggest one sector that might be caught significantly in the battle here are the suppliers,” Andrea said. “While the assembly operations have been planned and announced, there’s still a significant amount of supplier investment that needs to be put in place to support Mexican operations. Much of that supplier incremental growth is focused on supporting the Mexican operations.”

In short, the incoming administration’s trade policies could spell a great deal of uncertainty for automotive suppliers in the middle of large expansions in Mexico, Andrea said. 

TRIGGERING A DOWNTURN? 

Automotive assembly in Mexico is projected to more than double between 2010 and 2020, mostly due to $13.3 billion in investments by Japanese, European and South Korean automakers in that region, according to a report published by CAR. While the expansion of vehicle assembly capacity is expected to flatten out around 2020, “powertrain and sub-tier supplier capacities are expected to continue to grow close to their customer base.”

Andrea also notes that the U.S. is hardly alone in espousing isolationist policies, citing the referendum by Britain to leave the European Union as evidence that some world powers are turning inward. He also points to upcoming presidential elections in Germany and France as further points of uncertainty. 

Those geopolitical events, combined with softening auto sales and other global turmoil, could spark a downturn in the automotive industry, Andrea said. 

“When we look at this sale and economic cycle, the old adage is that economic cycles don’t die from old age — something has to trigger it,” Andrea said.

Despite the potential ripple effects of eliminating NAFTA and limiting trade, IHS Markit Automotive has struck an optimistic tone for the auto industry in the wake of the U.S. election.

“The U.S. election results may have surprised many, but the result does not present any imminent economic rupture or time-critical event, allowing time to evaluate the likely policy eventualities and separate them from the electioneering rhetoric and to then assess the potential policy impact itself,” the company said in a statement. 

According to IHS, any impact from a Trump presidency would likely be felt in late 2017 at the earliest.

SUPPLIER SOLUTIONS 

As experts guess how President-elect Trump might handle trade policies after he takes office on Jan. 20, West Michigan automotive suppliers have a handful of options to mitigate risk, said Andrea of CAR. 

He notes that a diversification strategy that includes new products, a mix of customers and potentially pursuing business outside of the automotive industry could prove to be the best hedge against turmoil caused by the incoming administration. 

And despite the negativity surrounding free trade, automakers will likely keep up investments in low-cost countries like Mexico. 

For its part, Ford has pledged to follow through on its plan to move production of the Focus and C-Max hybrid from Michigan to Mexico, primarily as a way to cut costs amid slow sales of small vehicles. Sales of the Focus and other small cars have stagnated in recent years amid low gas prices and consumer trends favoring crossovers and pickups, according to reports. 

Detroit-based General Motors Co. also announced earlier this month that it plans to shed 2,000 workers between its Grand River Assembly Plant in Lansing and the Ohio-based Lordstown Assembly Plant because of sluggish small car sales. 

While opinions on how a Trump presidency could affect the automotive industry vary, Kurk Wilks, vice president of Portage-based Mann+Hummel USA Inc., is positive that the industry remains in a strong position to pivot and adapt as needed. Wilks notes that he has not heard any concern from the company’s Germany-based parent organization, which operates two facilities in Mexico. 

“It’s business as usual,” Wilks said. “If there are changes, we’ll look at those and adapt, but in the meantime, it doesn’t do us good to speculate.” 

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