What Donald Trump’s election could mean to auto industry?

  Jepic   Dec 22, 2016   Blog   0 Comment

The factor that was largely ignored in much of the coverage of this election was economics, particularly how disenfranchised voters felt in places like Michigan and Pennsylvania and Ohio as American manufacturing has declined. That includes the automotive sector. We saw the effects of that on Election Day.

Donald Trump has pledged to revitalize the mainly white working class that elevated him, a tough task given an aging U.S. workforce, dwindling options for people with little education and years of stagnant pay. Trump has said he’d slash taxes, strong-arm U.S. trading partners, end commitments to environmental rules and make it easier to drill for oil. Trump favors cutting regulations that he says stifle businesses. During his campaign, the real-estate tycoon pledged to unpick the North American Free Trade Agreement (NAFTA) as well as a breakthrough nuclear pact with Tehran, saying both were among the worst deals ever made.

Trump election brings trade uncertainties for automotive companies. Suppliers punished by investors despite broad market increase because of worries about tariff policies. In reuters, Edward Taylor and Laurence Frost explain: Germany’s mighty automakers voicing concern that Donald Trump’s election as U.S. president may damage trade, and with it their business. “It is to be feared that the United States under a new president, just like China, will mainly focus on their own economy at the expense of international trade flows,” said the VDA, an association representing Volkswagen (VOWG_p.DE), BMW and Daimler along with other manufacturers and suppliers.

NAFTA – all eyes on Mexico

The U.S. Department of Commerce has 20-year statistics on trade and other economic indicators. This provides the opportunity to consider how trade, investment, and employment have changed during the past two decades in light of the NAFTA provisions on trade and investment:

“NAFTA has clearly succeeded in stimulating trade and investment among the United States, Mexico, and Canada. Total two-way goods trade between the United States and our NAFTA partners grew a remarkable 279% between 1993 and 2012, while total two-way trade between the United States and the rest of the world grew by 260%. As of 2012, U.S. firms had captured 50% of Mexico’s total goods import market, and 51% of Canada’s total goods import market.”

“NAFTA markets represent significant surplus markets for U.S. produced goods and services. In our trade with Canada and Mexico in 2012, the United States registered a $20.9 billion trade surplus in manufactured goods, a $43.7 billion trade surplus in services, and a $3.0 billion surplus in agricultural products.”

“NAFTA markets combined are the largest foreign suppliers of crude oil to the United States. While the United States did register an overall combined trade deficit with Canada and Mexico in 2012, driving this deficit were U.S. imports of crude oil which reached $72 billion and $37 billion respectively, representing more than one-third of total U.S. crude oil imports.”

“NAFTA markets are significant for U.S. exporters, particularly small and medium-sized enterprises (SMEs). More than 130,000 U.S. firms exported products to our NAFTA partners in 2011, of which 96% were SMEs.”

“NAFTA relaxed investment restrictions in Mexico, including local content, trade balancing, market share, and market access requirements, which boosted total U.S. investment in Mexico by 495% from 1994 to 2012. Mexico’s investment in the United States increased 819% from 1994 to 2012, while investment in the United States by non-NAFTA countries grew by 448%.

“NAFTA’s patent provisions support Mexico’s world-class patent regime and strengthen U.S. competitiveness across North America. U.S. firms, particularly those in pharmaceuticals, scientific equipment, and information communication technology, have benefited from strengthened NAFTA patent provisions.”

“NAFTA reduced or eliminated many barriers limiting market access for goods and hindering trade in services. This means U.S. exporters have greater market access and a price advantage over other competitors including South Korea and China. Without NAFTA, U.S. firms would be at a severe disadvantage to key European and other competitors in Mexico that receive duty free access on a wide range of goods and preferential market access in services sectors under the Mexico-European Free Trade Agreement and its other Free Trade Agreements.”

“NAFTA provisions in the auto sector allow U.S. automotive producers to treat the three countries as a single market, maximize efficiencies, and remain internationally competitive.

NAFTA, which became effective in 1994, has led to a loss of manufacturing jobs in the U.S. with many—but not all—of those jobs going to Mexico. Mexico passed Canada in 2008 to become the second biggest manufacturer of new cars in North America.

Donald Trump reiterated his campaign pledge to renegotiate NAFTA, saying he’d “terminate” the pact if “we don’t get the deal we want” and negotiate a “much better deal for our workers and our companies.” He also reiterated his campaign pledge to impose a 35% tax on products made in Mexico and shipped back to the U.S. by companies that move jobs to the country. It’s unclear what legal mechanisms Trump would use to impose such a tax. Trump went hard after NAFTA during his campaign. His election is going to have a seismic impact on the automotive industry and trade as a whole.

Trump railed about corporations moving jobs across the border to exploit what he called a lopsided North American Free Trade Agreement. He vowed to scrap the pact, impose tariffs on Mexican imports and punish U.S. companies including Ford.

UAW President Dennis Williams said the union hoped to work with the incoming President-elect Donald Trump to change, fix or dismantle the North American Free Trade Agreement: “I am prepared to sit down and talk to him about trade. NAFTA is a problem. It is a huge problem to the American people,” Williams said.

For years, the UAW has railed against NAFTA and other free trade agreements while Republicans have generally supported free trade deals. This year, Trump turned Republican politics upside down by appealing to working-class union members and promising to pull the U.S. out of NAFTA.

Ford was Trump’s punching bag for having moved production to Mexico. Nearly all automakers have built new plants in Mexico in recent years because of lower labor costs. Automakers and many of their suppliers have billions of dollars of investments planned for Mexico. Ford Motor Co. announced earlier this year plans to invest $1.6 billion to expand production of small cars and General Motors Co. intends to invest $5 billion in the next few years.

A primer on executive power: Trump can’t end same-sex marriages, but he could speed up deportations. Vehicles including some Chevrolet Silverado Crew cabs, Fiat 500, Ford Fiesta, Ford Fusion, Honda Fit, Nissan Versa, some Ram pickups, the Volkswagen Golf and others are made in Mexico. Since 2010, nine global automakers, including GM, Ford and Fiat Chrysler Automobiles NV, have announced more than $24 billion in Mexican investments. VW’s Audi, BMW AG and Daimler AG each build or plan to assemble luxury vehicles, engines or heavy trucks in the low-cost country, which Trump says has benefited at the expense of the American voters who propelled him to victory. Output in Mexico may more than double this decade, from 2 million to 5 million vehicles, according to the Center for Automotive Research in Ann Arbor, Mich.

While the UAW and Trump disagree on many issues, Williams sees an opportunity for labor unions and the new president to find common ground. He also endorsed Trump’s proposed 35% tariff on cars imported from Mexico even though the rules of the World Trade Organization, an organization formed in 1995 with 164 members, bars punitive tariffs on a single country. Even with a potential ally in the White House on trade issues, Williams acknowledged that dismantling NAFTA would be difficult. Automakers have spent billions to build plants in Mexico and suppliers have followed, setting up their own plants close to the assembly plants.

Imposing steep tariffs on those vehicles or erecting trade barriers would cause the price of those cars to increase in the U.S. and could throw the U.S. auto industry—and the companies that employ the most UAW members—into turmoil.

“If Mr. Trump follows through with what he has advocated, we will see some of the highest tariffs in U.S. history levied against imports from China and Mexico,” Ballard said. “That would cause a lot of disruption in the supply chain, because a lot of goods imported from Mexico involve parts that were made in the U.S.”, said Charles Ballard, economist at Michigan State University.

Matt Simoncini, president and CEO of Southfield-based automotive seat supplier Lear, believes the fear over Trump’s anti-trade policies are overblown. (Lear operates 17 facilities in Mexico, including several large manufacturing plants): “He doesn’t have the authority in the executive branch to accomplish this,” Simoncini said. “But it would be pervasive across the industry; it’s not like one supplier would be hurt more than another. We’d all have to adjust accordingly, and we would.”

But Ballard believes auto-heavy countries such as Mexico and China could react with their own tariffs, further constricting U.S. auto companies in the face of their own new tariffs: “There has been very little discussion of the possibility of retaliation, but I think it is a very real possibility,” Ballard said. “If the U.S. does in fact impose high tariffs on imports, the governments in China and Mexico will see it as a very hostile act. If the history from the Smoot-Hawley tariffs of 1930 is any guide, they will retaliate by imposing tariffs on U.S. exports. Last year, the U.S. exported a total of more than $400 billion to China and Mexico. Much of that would be in jeopardy.”

Chicago-based investment research firm Morningstar Inc. issued an analysis recently, stating Trump’s trade policies would surely decimate auto industry profits and raise consumer prices on vehicles: “If Trump were successful in his anti-free trade agenda, then we think prices on all vehicles would go up over time even for Detroit made vehicles, because they do import electronics content. Abolishing NAFTA would be negative for every major automaker since everyone uses Mexico, not only to import into the U.S. but also to export to Europe and at least in the past, to South America. Removing production in Mexico that is exporting to the U.S. and putting that capacity in the States adds costs, which hurts profits and hurts consumers who pay more for a vehicle.Trump’s tariff plan would add at least $5,000 to the price of imported cars”, said the Original Equipment Supplier Association.

Toyota and Nissan have declared that the U.S. is probably done being the golden profit-goose it’s been in the last couple years as record sales have already likely peaked. Via Bloomberg: Toyota Motor Corp. cut its forecast for North American sales this fiscal year by 60,000 vehicles and for the first time said it’s expecting a decline for the year, as American consumers shift away from fuel sippers like the Prius hybrid and toward trucks, crossovers and SUVs. Nissan Motor Co., which posted a drop in profit as it gave heftier incentives that buoyed deliveries, said it’s not seeing room for further expansion.

“The market turned out to be somewhat weaker,” Takahiko Ijichi, a Toyota executive vice president, told reportersafter the carmaker reported a 43% plunge in quarterly operating profit. The North American market “really requires very careful managing going forward,” he said.

What about environment issues?

 

Will auto emissions rules be revised?

Trade group urges Trump to revise auto emissions rules. In ReutersDavid Shepardson reports that a major auto trade group urged President-elect Donald Trump’s transition team to revise fuel efficiency mandates that could cost them billions of dollars and called for a full-scale review of the Obama administration’s autonomous vehicle policies.

In an eight-page letter to Trump’s transition team made public, the Alliance of Automobile Manufacturers, which presents major automakers including General Motors Co, Ford Motor Co and Toyota Motor Corp, urged the incoming Trump White House to find “a pathway forward” on setting final fuel efficiency standards through 2025, calling on the next administration to “harmonize and adjust” the rules.

The letter also urges Trump to create a presidential advisory committee to “coordinate auto sector regulators” and said the panel could suggest a new approach to auto regulations. Automakers told Trump’s team in the letter “technology and change are swamping the regulatory capacity to manage our emerging reality. Reform is imperative.”

 

Major automakers have raised concerns about the Obama administration’s ambitious targets for cutting vehicle greenhouse gas emissions through 2025, arguing low gasoline prices and weak demand for electric vehicles may require significant revisions to the rules. In September, the Obama administration unveiled guidance asking automakers to voluntarily submit details of self-driving vehicle systems in a 15 point “safety assessment.”

The National Highway Traffic Safety Administration (NHTSA) and Environmental Protection Agency (EPA) must decide by April 2018 whether the 2022 through 2025 model year requirements for fuel efficiency and greenhouse gas emissions are feasible or should be changed. Automakers in 2011 backed aggressive fuel rules to nearly double fuel efficiency by 2025, but only if the policy included a “mid-term review.”

On the campaign trail, Trump repeatedly vowed to restore auto jobs. On Wednesday, GM said it would cut 2,000 jobs because of slowing demand for smaller cars. Automakers have expressed concern that states may set their own self-driving rules that could make it difficult or impossible to roll out the technology.

The letter wants the Trump administration to harmonize fuel rules, warning automakers “may be in compliance with the EPA program, yet subject to fines in the NHTSA program… Potentially billions of dollars in fines under the NHTSA (fuel economy) program are anticipated.”

The letter also seeks a “robust examination” of the combined impact of “uncoordinated regulatory oversight” by at least 10 federal and state agencies. It urges creation of a new timetable for regulators to respond to industry requests and seeks that regulators adopt a “whole car cost analysis” for new vehicle regulations. The Trump transition team, NHTSA and the EPA did not immediately comment on the letter.

 

Will the auto electric market be in jeopardy?

Meanwhile politicians in Michigan are trying to figure out how to use the $2 billion Volkswagen was ordered to pump into electric vehicle research and infrastructure as part of the settlement. That clause has been criticized quite a bit though as EV demand sags with cheap gas. Via The Detroit News: Critics have accused regulators of forcing Volkswagen to pump funding into the U.S. electric car market at a time when sales figures show that drivers are turning to larger vehicles like SUVs.

They have also said the inclusion of funding for zero-emission vehicles in the deal could give Volkswagen a leg up in the electric-car market.“VW may be able to obtain substantial competitive benefits, if not a monopoly on electric vehicle infrastructure, under the required investments,” U.S. House Energy and Commerce Committee Chairman Fred Upton, R-St. Joseph, said in a letter to the Environmental Protection Agency that was co-authored by Rep. Tim Murphy, R-Pa.

But Adoption of electric cars could be affected by the expiration of tax credits associated with the technology. Under the current rules, consumers can claim up to a $7,500 credit for buying an electric car, so long as the manufacturer that produced it has not reached a federally mandated cutoff. This knocks the price of a Tesla Model 3 from $35,000 to $27,500, and for a Chevy Bolt from $36,620 to $29,120.

The future of these tax credits may come into question based on Trump’s opposition to the government picking winners and losers; once all the credits have been handed out, it would require government action to continue the program.“Traditionally, Republicans have been less supportive of policies that promote one technology over another, so there could be some austerity measures that could threaten alternative fuel incentives,” said John Eichberger, executive director of the Fuels Institute.

That, in turn, could drive up the price of electric vehicles. “Some of the biggest implications for alternatively-fueled vehicle makers may come in the form of new U.S. energy policies that favor traditional fuel sources such as oil and coal”, said Kathryn Thomson, a former top lawyer for the Federal Aviation Administration and the Department of Transportation.”Anybody who advocates for energy-efficient, sustainable solutions should be worried,” said Thomson. “On the one hand, Trump is saying, ‘Let’s look at all the options,’ and that’s positive. On the other hand, he seems to be pushing more-conventional fuels and technologies. And that’s not good for innovation, and that’s not good for efficiency and sustainability.”

Trump has signaled that he will roll back regulations on fossil fuels, approve the Keystone XL oil pipeline, and boost the coal industry. In May he said that his energy platform would not “pick winners and losers.”  Trump’s administration would be “clearly in favor of enhanced exploration and production of oil and gas as a tenet of energy, economic and national security policy,” Scott Segal, co-head of government relations at the legal and lobbying firm Bracewell, told the Washington Post.

Still, other analysts say that the current pace of innovation in electric vehicle technology will be enough to overcome those hurdles. “The industry, as a whole, is too far down the path of addressing what consumers want and need from EVs, with brands such as Tesla, GM and Nissan leading the way,” said Tony Lim, an analyst at Kelley Blue Book.

American automakers said they looked forward to working with President-elect Trump on his policies. “It’s hard for me to see a (Hillary) Clinton supporter ­— a higher income, more educated individual — will go out and buy a car this month,” said Charles Chesbrough, executive director of strategy and research and senior economist at Troy-based Original Equipment Supplier Association. “If we see strong sales, then clearly consumers have taken Trump’s policies with a grain of salt, but if it’s fallen significantly, we’re sure to see more uncertainty, which is not a friend of the economy.”

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