What are some of the biggest risks and financial implications that affect global supply chains? How will potential trade policy changes, including the re-negotiation of NAFTA, impact the auto industry?
Supply chain risk takes many forms.
3 main categories are:
- Price Risk
- Supply Risk
- Supplier Risk
A global survey of 650 supply chain professionals across 16 industries revealed that price volatility and disruption are seen as the major risks. The cost of disruption is high; about 40% are between $1 million and $100 million resulting from lost revenue, lost productivity and/or higher costs.
These risks lie within any of the three categories of risk. The automotive supply chain is increasingly expanding across geographical areas with ever-greater inventories, and this is in addition to the implicit risks associated with an event or interruption to that supply chain.
Specific to automotive industries, individual incidents can be costly; running into hundreds and billions of dollars from a global and corporate perspective.
What risks does the automotive industry face?
Automotive organizations identify the biggest risks to their supply chain as production problems, forecasting end-customer demand and raw material price volatility. The amount of the various risks is exponentially growing, and this is something organizations need to consider.
Primary disruptions to automotive supply chain in the past year include loss of productivity, customer complaints, loss of revenue and the increased cost of working.
A holistic understanding of the three areas of risk gives organizations the ability to map, monitor, prepare and mitigate risk.
Trump brings NAFTA back on the agenda
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President Donald Trump attacked the agreement between Canada, Mexico and the United States throughout the 2016 presidential campaign as a “disaster”, and is now making good on his promise to renegotiate it to give “American workers a fair deal”. If Canada and Mexico refuse, the U.S. will notify its intent to withdraw from NAFTA.
The automotive sector has a large stake in the re-negotiation of NAFTA. The three countries could make decisions that significantly change the rules underlying the North American vehicle production system and the trajectory of future investment and supplier decisions. A full de-coupling of the Canada and Mexico agreements would have profound supply chain implications.
What could change in NAFTA?
Potential changes to NAFTA include:
- Compliance: The original NAFTA had rigorous tracing rules that were designed to provide visibility to the automotive supply chain. Many automotive companies had hoped these requirements would be relaxed. Given the narrative about foreign countries “cheating” on trade, the compliance complexity is only likely to grow.
- Higher North American content requirements: The mildest scenario seems to be that the Trump administration would significantly raise the level of North American content required for a vehicle to be considered originating. At present, the regional value content requirement for light-duty automobiles is 62.5%. If this were to be raised to, say, 75-80%, one would expect fewer inputs from Asia and higher component and finished vehicle costs. This would place pressure on the profit margins of both OEMs and suppliers.
- “Trifurcation”: If the Trump administration converts NAFTA from a single trilateral agreement to three separate bilateral agreements — U.S.-Canada; U.S.-Mexico; and Canada-Mexico — would the rules of origin be entirely separate and unconnected? If so, each agreement would have separate value content requirements, raising the risk of necessitating companies to shift production in order to continue to qualify.
- Market Access: The prevailing assumption is that Canada will secure duty-free, quota-free access to the U.S. market in whatever agreement it negotiates. The situation is less clear for Mexico. The administration has repeatedly threatened border taxes on companies that invest in Mexico and export their output to the United States. This raises questions about whether the U.S. will demand tariffs or quotas for some manufactured goods.
Trump is making moves to change current policies, which will directly affect the supply chains of automotive industries in North America.
According to the terms of the Trade Priorities and Accountability Act of 2015, President Trump would be required to notify Congress 90 days before initiating negotiations of NAFTA and post summary details on the USTR website 30 days before beginning negotiations. The President has enormous authority to impose tariffs without congressional consent, but modifying other areas of agreement clearly implicates the legislative branch.
The negotiations are likely to take several months to truly get rolling and key strategic decisions remain to be made.