Auto parts suppliers may take NAFTA hit

• Automotive components manufacturing jobs have risen nearly 19% in the U.S. since 2012.
• More than 871,000 Americans are directly employed by the automotive parts manufacturing industry.
• Mexico’s auto supply industry employed just over 500,000 people in 2015.
• In 2015 alone, automotive parts manufacturers invested $3 billion in Mexico.

President Donald Trump, who has fumed about the migration of U.S. auto jobs to Mexico, dined early last week with the CEOs of General Motors, Ford Motor and Fiat Chrysler Automobiles.

Maybe he should have made room at breakfast for auto suppliers Lear, Magna and American Axle, too.

That's because the vast majority of auto-related jobs in Mexico are concentrated in making parts, not assembling cars and trucks themselves. The rule of thumb is about six to seven auto parts workers for every auto assembly plant employee.

Inexpensive parts made outside the U.S. are crucial for a booming auto industry here and abroad, industry executives say.

In the wake of Trump's campaign threats to renegotiate or even pull the U.S. out of a 23-year-old trade agreement with Mexico and Canada, executives at auto component makers are keeping careful watch and plotting strategy to prepare for major changes in the North American Free Trade Agreement (NAFTA) that could upend their investments.

"With respect to Mexico, and particularly with respect to the auto industry, where the three countries involved with NAFTA, the whole process of automobile production is now so intertwined, that to try to untangle that would be a terrible blow to the industry," said Marina Whitman, former chief economist for GM who now teaches at the University of Michigan.

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On Thursday, Trump administration officials said the plan for a wall along the Mexican border could be financed through a 20% border tax on all imports from Mexico. Earlier, however, others connected to the administration suggested there would be no widespread border tariff, only a specific levy targeting those who move jobs to Mexico

Experts say either move could have broad implications for auto-related jobs that have grown at home and on both sides of the border.

A Trump tariff could create some winners and losers in the sector. For some auto suppliers, limited investments in Mexico could be a benefit if Trump is successful in imposing a new tax on goods made there and sold in the U.S., according to Barclays' Brian Johnson.

Johnson earlier this month cited the potential for Tenneco, headquartered in suburban Chicago, as "a clear winner given it is a U.S. federal cash taxpayer that does not import components from Mexico."

A Tenneco spokesman declined to comment.

But other part suppliers could pay a price for heavily investing in Mexico as the low-cost industry has ramped up there.

Southfield-based Lear, with $18.6 billion in sales, has about 46,000 employees in Mexico — four times its employment in the U.S. and Canada combined — and operates 23 plants, according to a annual report. A 2015 annual report disclosed Lear had $2.7 billion in revenue from customers with operations in Mexico.

"We are trying to keep our head in the news, as well as working with industry groups ... (and) working with our customers to determine what the outcomes would be,” Lear  CEO Matt Simoncini told Wall Street analysts on an earnings call last week when asked about changes to NAFTA.

Because the company is in a "net import position" — bringing more parts into the U.S. than it sends out — a Republican tax plan floated by House Speaker Paul Ryan "would increase our tax rate, something into the 30s, if you will, from the effective tax rate of the high 20s as it stands today.”

But Simoncini added that "the beauty of being a company like Lear is we have the wherewithal both financially and operationally to make these components in pretty much every market we are in and that includes the U.S. “

That could mean greater investment in the U.S. over time, he said. Moving the operations to make a component could go from one location to another within about 12 to 18 months.

"It would be a probably modest step up as we put some capital in place," Simoncini said. "But I don’t think overall it would change the financial DNA or our investment thesis in a meaningful way.”

Neighbors to the north also have a big stake.

In 2015, Canada ranked as the largest export market for U.S. automotive parts with $22 billion in parts value exported, according to the latest U.S. government statistics. Mexico was a close second, with $20.2 billion in U.S. parts value exported.

Last week, the head of Canada's biggest auto parts maker confirmed he and his colleagues in Canada and the U.S. are meeting with local government officials to coordinate a response.

The group wants to show how free trade is key to the competitiveness of manufacturers across North America, Don Walker, CEO  of Magna International told reporters, according to Bloomberg News. A Magna spokeswoman did not return requests for comment.

Trump's threats of a border tariff as high as 35% and his hard-line approach toward threatening to withdraw from the agreement without significant concessions from Mexico worry Brandon Stallard, CEO of TPS Logistics, a Troy auto industry company, so much that he hopes Trump is bluffing.

"When you are talking about NAFTA, absolutely, folks are very concerned. And frankly (companies) don’t believe they can pivot fast enough," if a steep border tariff that would raise the cost of goods coming into the U.S. is imposed, said Stallard, whose firm manages about $1 billion worth of products shipped around the world annually.

"I spent some time last week with a group of suppliers and ... they very definitely are looking at contingency plans," he said.

The significance of the potential change to NAFTA to the relationship between the economies of the U.S., Canada and Mexico is hard to understate.

"Since the end of the Second World War, we have been on a downward trend on barriers of trade between countries," said Hoyt Bleakley, an associate professor of economics at the University of Michigan. "To find the last time that someone has talked about such a significant retrenchment you would probably have to go back to the 1920s."

The auto industry is increasingly global and interconnected across national borders. Every assembly plant is supported by dozens, if not hundreds of automotive suppliers who also have invested billions of dollars to build plants in Mexico or on tooling in U.S. plants to send parts to Mexico that wind up coming back to the U.S. on finished vehicles.

Despite a boom in Mexico, automotive components manufacturing jobs have risen nearly 19% in the U.S. since 2012, according to a study released last week by the Motor & Equipment Manufacturers Association. More than 871,000 Americans are directly employed by the automotive parts manufacturing industry.

Mexico’s auto supply industry employed just  more than 500,000 people in 2015. But fewer than one out of every  10 of them are in assembly plants, according to several industry estimates.

There are 345 major automotive suppliers — known as Tier 1 — with a presence in Mexico, according to a recent report by ProMexico, an arm of the Mexican government involved in economic development. In 2015 alone, automotive parts manufacturers invested $3 billion in Mexico, according to a report by the U.S.  trade representative last fall.

And the trade travels in many directions.

Mexico ranked as the largest export market for U.S. auto parts in 2015 overall, surpassing Canada, according to a 2016 report by the International Trade Administration, which is part of the U.S. Department of Commerce. U.S. auto parts exports to Mexico have more than doubled from $12.1 billion to more than $30 billion in 2015, the International Trade Administration said.

"Combined, our North American Free Trade Agreement (NAFTA) partners account for about 75%  of all U.S. parts exports. Trade between the United States, Canada and Mexico is bound by the terms of NAFTA. As a result, there are no duties on Canadian and Mexican imports of automotive parts that meet the NAFTA rule of origin," the ITA report said.

U.S. auto suppliers make up 19%  of the number of auto supplier firms in Mexico, with 18%  from Japan, and 12% from Germany, and most of these companies have U.S. operations, as well. According to the National Auto Parts Industry, Mexico is the sixth-largest auto part producer. Production has grown from $41.2 billion in 2009 to more than  $76.8 billion in 2013 with production exceeding $85 billion in 2015," the ITA report said.

Automotive suppliers have made significant commitments to production in Mexico. Indeed, 65% of all Mexican foreign direct investment across all industries is automotive supplier-related.

"It is difficult to determine how much of the Mexican supply base would potentially move or shift production back to the United States to support the 1 million additional units of capacity needed" in coming years, the Ann Arbor-based Center for Automotive Research wrote in a report on the impact of potential changes to NAFTA.

But those moving back to the U.S. to follow auto manufacturers "would be few — mainly those tied to the just-in-time plants and jobs manufacturing other bulky, fragile, or otherwise difficult to ship parts and components," the center concluded.

If the U.S. were to enact a 35% tariff on light vehicles imported from Mexico — as Trump has mentioned as a possible tactic — the Center for Automotive Research estimates car and light truck sales in the U.S. could drop by 450,000.

And that could lead to the loss of nearly 6,700 assembly jobs across North America, according to the research group. Tens of thousands more who work in automobile parts production could also be cut.

In an interview, Thomas Parker, North American automotive sales manager for the Swiss auto parts supplier Inficon, which makes leak detection equipment and has operations in Mexico, said it is possible that many auto suppliers would keep operations in Mexico if Trump's tax is limited to new cars and trucks, rather than to the individual parts.

Sometimes a supplier can lose work in Mexico even when it has a plant near an automaker's assembly plant.

Detroit-based American Axle is losing some of its axle production business at its Silao, Mexico, plant for General Motors' full-size pickups that are also made in Silao.

While GM made the decision in 2015 the automaker reconfirmed the plan last week when the company announced that it would invest $1 billion in its U.S. plants in a plan to create nearly 2,000 jobs. Included in those plans is a decision to "insource" 450 jobs in the U.S. to produce axles made by suppliers including American Axle in Mexico for light trucks.

American Axle broke ground for its Guanajuato Manufacturing Complex in Silao in 1998. Since 2015, American Axle has won new business from GM and other customers in Mexico and elsewhere, said company spokesman Chris Son.

"Because of these new business wins, we have been able to backfill nearly 90% of that lost revenue and we feel confident we have sourcing plans in place to prevent any loss of jobs," Son said.

For a supplier to succeed, they often need multiple clients in a region as a hedge in case one manufacturer alters its supply needs, according to David Andrea, executive vice president for research at the Center for Automotive Research.

The first suppliers arrived in Mexico to serve U.S. automakers looking for low-cost labor. But Andrea said the second wave of growth in Mexico not only serves the U.S. market but markets around the world, especially those where Mexico has separate trade agreements.

If Ford or GM uproot assembly plants in Mexico for the U.S., some suppliers that need to be close by — including those who make time-sensitive or larger parts — may join them. But others who make smaller parts may stick it out in Mexico and transport the parts north even with a new tax, according to Andrea.

Stallard, whose firm manages the shipments of goods for clients around the world, said he supports Trump's desire to improve NAFTA but hopes he is bluffing when it comes to his extreme positions.

"When you go back … and read 'Art of the Deal' … he is consistent with his rhetoric. He starts out very bold and ends up somewhere much more moderate," Stallard said.

Stallard said U.S. automotive suppliers are telling him they would struggle to find skilled workers ready and able to work in new U.S. plants at the volume that would be necessary to absorb the fallout of a 35% tariff on imported goods. He estimates that it would take the industry more than 15 years to build the plants, find the workers and train them to adapt.

"To dismantle NAFTA is just hard to believe," he said.

By week's end, the Trump administration made more room at his table for discussion over the future of manufacturing, including the auto industry. The White House on Friday released a list of 28 prominent business leaders who will advise Trump on manufacturing growth.

This time, a large auto parts maker was part of the mix.

“I look forward to be working with some of the nation’s most innovative and successful business leaders as we explore opportunities to promote job growth," Jim Kamsickas, president and CEO of Dana, said in a statement about being named to serve in the group. "It is a true honor to serve our country as we work together to develop strategic initiatives for expanding American manufacturing.”

A Dana spokesman said Kamsickas was not available Friday to discuss any possible changes to NAFTA.

Contact Matthew Dolan: 313-223-4743 or msdolan@freepress.com. Follow him on Twitter @matthewsdolan.