Published in Manufacturing

Crystal Ball 2019 Outlook Q&A: Mike Wall, IHS Markit

BY Sunday, December 23, 2018 06:41pm

The 2019 forecast for the automotive industry remains steady, although sales are expected to experience “a little bit of a step down” to 16.8 million units compared to an expected 17.1 million units this year, according to Mike Wall, director of automotive analysis at IHS Markit. The big cloud over the industry currently hinges on tariffs and trade deals, specifically the United States Mexico Canada Agreement. Wall expects the USMCA to get enacted in some form, even though he does expect to see “some adjustments on the margins.”

Will the USMCA be a good deal for West Michigan-based automotive suppliers?


The devil’s in the details in this thing. First of all, the concepts and the construct around USMCA versus NAFTA are not all that dissimilar. We see things like local content, regional local content, and all that. Now, those numbers are going up, and there’s this labor content component now too. All of those are setting the stage that it wouldn’t surprise me to see some opportunities for suppliers such as West Michigan suppliers to potentially benefit in terms of maybe getting sourced on new business, owing to the fact that they’re building in the U.S., for example. I do think there’s going to be some contenting opportunities.

Does that translate into more jobs in the supply chain locally? 

The challenge to that is there’s a difference between seeing some content shifting to the U.S. and seeing jobs shift to the U.S. Even with pre-USMCA, frankly, we were seeing local suppliers and suppliers in the Midwest and the U.S. expanding. You’ll see these expansions, you’ll see these add-ons to different buildings and definitely we’re seeing investment, but it’s not necessarily adding a bunch of new jobs. It’s solidifying the jobs that are here, and I’m not trying to diminish that. But this direct correlation to an influx of jobs, I think more realistically what we’re going to see is a greater use of automation. That’s an ongoing progression there.

How might the new agreement affect where suppliers invest? 

There was a period of time coming out of the recession where suppliers were starting to grow, and suppliers were increasingly being told or being certainly strongly encouraged to go to Mexico or go international. I wouldn’t say there’s always a compelling reason, but I tell you what: If you’re a high fixed-cost supplier with significant equipment and maybe a relatively lower labor cost component, we’re going to see more compelling rationale to be doing that assembly work in the U.S. It’s really supported by these trends that we’re seeing with the USMCA.

What is an example of how that might play out? 

If you’ve got a stamping situation where you’ve got a facility in Mexico or you’ve invested down there, you’re not going to necessarily pull that back here, per se. But if … you may have been inclined to move that to Mexico, and you’ve got that fixed investment here and maybe you’ve automated the line or maybe you do have some value-added assembly to it, it can make you think twice or at least run that cost analysis again. I think that’s what you’re going to see. 

Frankly, I think we’re going to have to see automakers and suppliers alike really taking a close look at their cost, their building materials and their costing. This process of increasing labor content is not going to happen overnight. This is obviously a phase-in process of three years, so we’ve got a runway to work with. But if we have that runway, more and more eyeballs are going to be looking at things like where are we going to be getting these parts from and what is that labor content cost.

What happens if Congress doesn’t approve the USMCA and we go back to pre-NAFTA rules? 

Let’s hope it doesn’t go down that road. If the administration tries to call the Congress’ bluff and says, ‘Here’s USMCA, approve it, and by the way I’ve already alerted you that we’re stepping out of NAFTA,’ then it’s in Congress’ hands. Do they continue to negotiate or try to push it along further? 

Who wins in that case?

Well, it’s more cost. Eventually, that’s the challenge with all this trade ‘sturm und drang.’ The fact that we’ve gotten some semblance of potentially an agreement on (the replacement to) NAFTA is huge — that was a big overhang. But any of this, it just adds additional costs, and eventually that’s going to have to trickle down to the consumer. Things like the steel and aluminum tariffs, I think you can make an argument that’s something that is not necessarily transmitted down to the customer yet. In fact, much of it probably hasn’t. But we’re going to get to a point where … it’s going to have to start trickling down.

If raw materials and all these inputs are getting more expensive, are the OEMS still asking for price concessions as aggressively as they had been?

Oh, yeah. Absolutely. It never went away. I will say there seems to be a little bit more rationality to it. I don’t want to say this is a case of we’re going back to the bad old days or anything like that. In fact, some suppliers are getting better and more adept at maybe saying no, or maybe offering other options or collaborating a bit more, too. But (they’re) kind of all in the same boat to an extent. As you start to see more of these tariff impacts, and some of these Section 232 type of impacts, if they go down the rabbit hole and we levy it on all nations, everybody kind of gets touched in some way, shape or form. I don’t know if there’s anybody that’s completely immune to it.

As Congress works on USMCA and the administration keeps upping the pressure on China, how is that affecting how the automotive industry approaches 2019?

If I’m an automaker or I’m a supplier, it’s making it hard to commit millions of dollars or hundreds of thousands of dollars, depending on the size of the company, into some sort of investment internationally or in other markets, if we don’t have a real good sense of what the trade landscape’s going to look like. If you think about it, prior to this administration, that was one thing we didn’t really have as much on the radar in terms of a high degree of risk or a high degree of uncertainty. That is something that really everyone’s having to wrestle with right now.

Interview conducted and condensed by Joe Boomgaard. 

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