The new USMCA agreement (formerly known as NAFTA) that changes the regional content from 62.5 to 75%, among other relevant changes, was ratified by Canada, US and Mexico. With the outbreak of COVID-19, new barriers have risen and may be difficult for the OEM’s to meet the new implementation deadline established for July 1st, 2020.
As we move through the COVID-19 pandemic and as the auto industry prepares to re-start production, OEM’s and suppliers will face challenges that may be exacerbated by the implementation of the new USMCA:
COVID-19 Regulations: Though some automotive suppliers plan to restart production in early May, they must adhere to federal and local government social distancing and stay-at-home regulations related to COVID-19, this would require additional planning, plant layout changes and a stronger focus on employee well-being
Economy slow-down: As more people sign for unemployment in the US (~ 16%), Canada (~ 11%) and Mexico (~3.7%), the auto-industry is predicting a loss of sales. If China would serve as an indicator, auto sales dropped 43% y/y in March during the stay-at-home order, although it is improving as production re-starts with a continuation of government incentives. In North America sales forecast are expected to decrease by ~25% for 2020 (according to IHS Markit optimistic scenario)
Longer than expected supply chains: As OEM’s and suppliers suspended operations, the product component pipeline is limited and re-starting will represent a challenge, especially for regions and companies hit the hardest by the pandemic. Raw materials may not have been produced and lower level tiers (tier 2’s, tier 3’s and more) may have more difficulty to fulfill requirements. Concerning transportation, larger companies may have shifted to transport non-automotive part products necessary for COVID-19 response while smaller companies are struggling to survive
New USMCA requirements: Implementation of the new USMCA is now expected to be July 1st.
Mexico requested implementation date until January 2021 claiming, as did the North American auto industry groups, a limited clarity and uniformity on new rules interpretation. Obtaining clarity soon is unlikely as all three governments are currently working remotely and the automotive industry is shut down. However, it is expected that the implementation of the USMCA will represent additional costs for the industry, the US International Trade Commission estimates that the cost of a vehicle is estimated to increase ~1.61%, with analyst showing a demand falling by more than 140,000 units in the US alone.
While the future for the automotive industry seems challenging, here are some recommendations to restart production in a COVID-19 environment and follow USMCA rules:
Adjust your business plan: The new plan should reflect the impact of COVID-19 and USMCA implementation in your initiatives and production. It is important to focus on increasing your knowledge of the industry, rely on business partners and industry experts, understand market indicators, current events impact, new regulation and competitors to be able to adapt to the current conditions
Understand your supply chain: Map out your supply chain with the support of an internal cross functional team engaged with all your external partners. Identify potential bottlenecks to understand any possible disruption when production starts and to track all material origin in preparation for USMCA implementation. Though this becomes more challenging at lower supply tier levels, it will help you to manage the complex regulation requirements and support production planning
Work closely with government and automotive organizations: Restarting production will require close monitoring of municipal, state and federal government guidance to allow employees back to workplace. Companies should develop their own safety protocols that ensure that government and WHO recommendations are followed to gain employee confidence.
Automotive organizations like the Motor & Equipment Manufacturer Association (MEMA) and its division, Original Equipment Supplier Association (OESA), National Automotive Dealer Association (NADA), and Asociacion Mexicana de la Industria Automotriz AC (AMIA) are there to support their members, serve as one voice and as a link with government officials.
After 26 years of NAFTA, the automotive industry is highly intertwined, and any production changes impact all three countries at some level. Plans to re-start production after COVID-19 pandemic halt, have revitalized coordination and cooperation among Canada, US and Mexico. This coordination and cooperation should serve as a good example on how countries should work together to re-engage the economy while protecting their employees. That same coordination should be used to work with the governments to ensure a successful USMCA implementation, even if that means considering further delays.