Kevin Lamarque | Reuters President Donald Trump talks with a U.S. Customs and Border Protection (CBP) Border Patrol Agent while participating in a tour of U.S.-Mexico border wall prototypes near the Otay Mesa Port of Entry in San Diego, California, March 13, 2018.
President Donald Trump's decision not to follow through with a shutdown of the Mexican border comes as a big relief for U.S. automakers, especially considering the industry is already struggling with the administration's tariffs on imported aluminum and steel and a slowdown in U.S. sales.
Nearly every major automaker saw sales fall in March and for the first quarter as a whole with Cox Automotive predicting U.S. new vehicle demand will be off as much as 7% for all of 2019.
"The industry had a tough first quarter," Reid Bigland, the head of U.S. sales for Fiat Chrysler, said during a conference call with reporters this week. He said the automaker was hoping the industry would see the market pick up steam in the weeks ahead during the traditionally strong spring buying season. A shutdown of the Mexican border could have scuttled that, threatening to leave dealers facing short supplies.
Mexico has grown from an automotive backwater to become the fifth-largest producer of fully assembled vehicles in the world, according to federal data. All told, about 2.57 million light-duty vehicles were exported from Mexico to the U.S. last year, industry data show. That included about 30 models sold by 15 different automotive brands, according to Mexico's Instituto Nacional de Estadística, Geografía e Informática.
It's a diverse list that includes the likes of Fiat Chrysler's new heavy-duty pickup, the Ram 2500, the Audi Q5 crossover and the all-new Chevrolet Blazer SUV. The latter is one of General Motors' newest products, and dealers are still struggling to build up inventories to meet anticipated demand. They'd have been hit hard by even a brief border closure.
But even products built north of the border were at risk, according to industry analysts. Anything more than a brief shutdown could have had "devastating consequences" on the U.S. assembly and parts plants that employ about 1 million American workers, cautioned David Cole, director-emeritus of the Center for Automotive Research, or CAR.
Since the original North American Free Trade Agreement, or NAFTA, went into effect on January 1, 1994, "the auto industry has developed a highly integrated manufacturing network that has essentially eliminated borders" between the three trade partners, Cole added.
CAR research shows that $112 billion in autos and auto parts were imported from Mexico in 2018, while $36 billion was exported. On an average basis, that would work out to more than $400 million in automotive goods per day that could have been stuck at the border.
In some instances, the impact, as Cole noted, could have been minor. Dealer's routinely keep about 60 days of vehicle inventories on their lots, though that can run far longer for slow-selling models.
But American-made vehicles, especially hot-selling products such as the new Ford Ranger pickup assembled in suburban Detroit, could have been hit by a border closure. While the figure varies by manufacturer and model, industry data indicate that 38% of the imported parts used in American plants come from Mexico.
Many of those are relatively small and inconsequential items, such as trim pieces. But other parts are large and expensive, like the transmissions used in the Chevrolet Corvette.
Even before NAFTA and the explosive growth of Mexican auto assembly operations over the past quarter century, Mexico was already carving out an automotive niche for itself by creating a special export zone called the maquiladoras, just south of the U.S. border. It has come to all-but-dominate supplying some key components — about 70% of the wiring harnesses used on American assembly lines today coming from Mexico.
Automakers have occasionally found ways to keep assembly plants running despite shortages of inconsequential parts. The assembly process can barely begin, however, without those bundles of wires that thread throughout every new vehicle.
Back when NAFTA was new, the auto industry might have been able to live through a brief border shutdown by drawing down factory inventories. No longer, said analyst Cole. Today, the just-in-time manufacturing system, with inventories trimmed to the bare minimum, has become the norm. It helps manufacturers reduce costs and keep a better handle on quality, but even brief logistical disruptions can prove calamitous.
A fire at a single supplier plant in Michigan last May resulted in lost production of thousands of Ford F-Series pickups. A border shutdown, CAR and other industry experts said, could be several times more severe. And finding alternative parts is, with rare exception a non-starter, at least on short order.
"Any action that stops commerce at the border would be harmful to the U.S. economy, and in particular, the auto industry. Access to Mexico's market place and North American integration are critical to operations in the U.S.," Matt Blunt, president of the trade group, the American Automotive Policy Council, said earlier this week.
Several senior automotive executives told CNBC they were "monitoring" developments in the president's ongoing dispute with Mexico, privately admitting they are pleased by the decision to abandon the idea of a border shutdown — at least for now. Industry officials have been reluctant to openly criticize the president for fear of becoming a target of his frequent tweets.
The question is what happens next. During a White House meeting on Thursday, Trump told reporters, "If the drugs don't stop or largely stop, we're gonna put tariffs on Mexico and products, in particular cars. The whole ballgame is cars. If they don't do it, we're gonna tax the cars. And if that doesn't work, we're gonna close the borders."
In an industry used to long-term planning, a year isn't very much time. But the auto industry has other matters to worry about that could hinge on what Trump does in the coming months. There are the tariffs enacted last year on metal imports that, according to GM and Ford, added about $1 billion in costs for each of them in 2018 alone. An even bigger issue is how the president will respond to a recently completed Commerce Department study that explored whether auto imports pose a threat to national security.
The president will have to decide what to do by next month but could enact up to 25% tariffs on cars and car parts imported from many parts of the world.As with the border shutdown, the impact could hit even American-made vehicles, Toyota estimating such a move might raise the price of a Kentucky-assembled Camry sedan by $1,600. That, trade groups such as the American International Automobile Dealers Association have warned, could really send the U.S. car market crashing, raising concerns about not only the 1 million Americans working at auto and auto parts plants, but the hundreds of thousands of others at dealerships and other related businesses.