Trump bursts onto the automotive supply chain

At this stage, it is hard to estimate what Donald Trump’s Twitter statements mean, however superficially the impact of his comments about the importation of motor cars from Mexico appear to have alarming implications for supply chain management at a global level.

On Tuesday January 3 2017, Trump made the comment that “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!” This prompted General Motors to assert that demand for these cars was supplied exclusively from the Lordstown plant in Ohio and that Mexican production served markets outside of the US.

Ford then announced that it had cancelled plans for a new plant in San Luis Potosi in Mexico, stating that it was expanding production in Michigan instead. Mark Fields, Ford’s CEO commented that this was due to a “dramatic decline for the demand for small cars here in North America” as well as a “vote of confidence” in Donald Trump’s “pro-business” policies. Trump replied by saying “Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the U.S. This is just the beginning – much more to follow”.

Now Trump has lashed-out at Toyota saying on Thursday: “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.”

If vehicle manufacturers were to feel under pressure to start changing their supply chain policies, global trade and logistics markets would come under substantial pressure. To take the Mexican example, much of production in Mexico relies on major components- including items such as engines and gear-boxes- made in the US. The reverse is also true, with Mexican plants acting as sources for parts for US production. Unravelling this supply chain structure would be possible but expensive and would have a major impact on rail and road freight across the US.

The effects on the South Korean, Japanese and German economies would also be immense even if the US levied only modest increases in import taxes. The logistics sectors of all three economies are heavily dependent on automotive related demand.

The problem that the car industry faces is that it has been favouring cheaper locations to serve markets such as the US. The assertion that vehicle manufacturers are making smaller, cheaper vehicles in Mexico, whilst the larger more expensive SUVs are made in the US, is only partially true. Most of the big manufacturers have diverse production facilities in the country and are planning to expand them. For example, Audi is building a large new plant dedicated to producing the Q5 model aimed at the market in the US.

The senior managements of the major vehicle manufacturers must be hoping that Donald Trump will not implement the sort of policies he has been articulating on Twitter recently. The management of major LSPs should be thinking similarly.

Source: Transport Intelligence, January 6, 2017

Author: Thomas Cullen