Prodensa Group´s Alejandro Mendoza, Partner/COO and Carlos Alvarado, VP Business Development talk about market collaboration and supplier relationship sustainability as keys to a competitive supplier network in North American amidst trade uncertainty.
United States Mexico Canada Agreement (USMCA)
The United States, Mexico, and Canada signed a trade deal to replace NAFTA on November 30th, 2018
at the G20 summit in Argentina. The new trade agreement is called the United Sates-Mexico-Canada Agreement, or USMCA.
Regional content and labor value requirements
Under the new rules, automotive manufacturers will face new regional content requirements stating that only products with at least 75% of the value produced in any of the three North American countries will be allowed to move duty free within the USMCA zone. There will also be additional content requirements for different auto-parts categories. The agreement also states that 70% of the steel and aluminum used in automotive production must originate in North America.
In addition to regional content requirements, the USMCA also includes a new labor value content requirement mandating that 40-45% of the cost of a vehicle´s assembly and components must come from facilities where workers earn at least US$16 per hour.
USMCA Supplier Implications
If the rule changes are implemented as proposed, the North American manufacturing industry will see a dramatic shift. It´s estimated that up to 40% of passenger cars and light trucks currently manufactured and traded in North America may not be compliant with new rule changes. The new USMCA will lead to readjustment across the North American automotive industry and affect supply chains in countries that export components and parts to North America.
Challenges for new requirements in origins of raw material
“The current challenge will be the implementation of these rule changes in the USMCA that may implicate new raw material sources which will require a supply chain review to track the origin of the raw material, such as steel”, said Mendoza, as well as aluminum and textiles. “A lot of the activity that we have been seeing in the past year has a lot to do with [raw materials content requirements] and in some cases implies some major changes in the supply chain for these OEM´s, for example”, mentioned Alvarado.
“Planning for the unknown is extremely difficult and there are no guarantees to the outcome of the future scenarios that are detected today”, said Mendoza. Activities planned by corporate offices to adjust business cases and cost models have been put on hold due to the pending ratification process as well as the uncertainty with the market as a whole. In fact, both Mendoza and Alvarado perceive more concern and uncertainty in clients regarding the China trade war than the USMCA. “The market changes outside of the USMCA are actually putting more companies at risk”, continued Mendoza. The challenge will be to understand how these tariffs will affect the company, especially in their supply chain, which may impact a greater discussion about competitiveness in the North American market, alongside the new content and labor rules that are proposed in the USMCA.
US-China trade war and tariffs
Since mid-2018 the United States and China have been engaged in an intense trade war, causing analysts to scramble to generate possible scenarios with each new piece of information. So far the US has imposed tariffs worth US$250 billion worth of Chinese products and has threated to at least double that number. These tariffs are threatening the supply chains of North American companies that source anything from handbags to railway equipment from China.
“The majority of our clients have more risk in the aluminum and steel raw materials content requirements and supplier base, especially in Asia, and are looking for alternatives”, commented Alvarado. “The market changes outside of the USMCA are actually putting more companies at risk, and even indicating other industries outside of automotive- like aerospace and medical- that have not previously been greatly impacted with changes to trade compliance” added Mendoza.
Between navigating new USMCA regional content and labor value rule changes and analyzing global supply chains for tariff-causing price increases and logistics complications, the North American manufacturing industry is seeking resolution and clarity into their business strategy.
Supplier Network Rationalization
Developing a business case and scenario-planning review for your operation as well as for your current and backup supplier network is imperative to any strategy execution. Applying a multi-factor assessment to analyze cost, volume, standardization, value risk, etc to your supplier network will give the foundation to scenario-planning and network optimization that will increase competitiveness.
Business case and supplier assessment
“Recognize that you´re part of a market trend. The real world requires you to build a real business case and analyze challenges and opportunities. Identify strengths/weaknesses and economic trends as well as adapt sourcing efforts. Work on the validation of that business case, and recognize that the numbers are not easily modifiable and thus have a significant impact on your success story. It´s not just about cost, it´s also about tax implications for the country of operation as well as culture and building the business case, then working on continual validation.” – Alejandro Mendoza
“It´s important to first make an internal analysis of what you are doing as a company and look at the supply chain and question the competitiveness and sustainability. Ask yourself, `these suppliers that I have today, are they going to have enough labor to sustain the operation so that I can rely on them in the future? Would they be willing to make a move with me if it is required? What [material] sources do they have further down the supply chain and are they willing to adjust?” -Carlos Alvarado
Transparency in sub-tier supply chains
Both Alvarado and Mendoza stress the importance for transparency and clarity into supply chains. “Companies need to find a way to engage with their suppliers to make sure that they pass the information out, and it has to go all the way downstream and upstream on the supply chain, which is not going to be that easy because today companies just simply ask for [the origin information] and they believe in what [information] they get”. Mendoza also argues that this will trigger additional complexity and activities in order to be compliant with the new rule changes. Alvarado adds the importance of teamwork to comply with new rule changes to avoid any disruption in the supply chain and production of the final product.
The rule changes will ultimately create dramatic shifts in the North American market. It will provoke scenario-planning and business case review as well as potential reshoring activity aiming to comply with new regional content and labor value requirements proposed in the USMCA. This reshoring activity has the potential to create opportunities for new suppliers to enter the arena while requiring optimization and efficiency through company and market collaboration, argues Mendoza.
Building Competitive Supplier Base Through Collaboration
North American trade and market changes will require the architecture and optimization of competitive supply chains through market collaboration and sustainable supplier relationships.
Competitiveness at a new level
Mendoza argues that the key to a competitive North American supplier base relies on market collaboration instead of traditional sourcing strategies focused on individual company cost savings and protectionism of supplier networks. “Even today, when referring to nearshoring and the relocation of suppliers, the main driver is still cost, not the construction of a new supplier relationship that involves how to use knowledge, and to transfer that knowledge to suppliers so they can become more productive and more engaged to work with you due to the shared interests…”
Hear more about the keys to supply chain competitiveness in the full interview.
“We need to shift the focus to mutual growth and support the key suppliers to grow alongside clients, creating long-lasting relationships. Instead of worrying about protecting the relationship and maintaining an exclusive networ
k, we need to work within or across industries to promote the increase in supplier cap
acity to be able to obtain a more premium cost.” The market is seeking dynamic and adaptable suppliers and may no longer focus on long-term, exclusive supplier contracts, but instead reliable sources and partners that add to productivity and are adaptable to support new market requirements as they emerge.
Mexico remains a competitive site selection
Competitiveness in the supplier base also relies on the capitalization and strategy execution of opportunities identified with shifting markets due to trade rule changes. “Geographically-speaking Mexico is still a great advantage and there will continue to be a very strong relationship in North America with the way that the US continues to be the market for end-consumer, and the way in which Mexico and Canada interact with the US in terms of overall manufacturing capacity coming from the supply chain,” Alvarado comments.
“It has been almost 25 years since the signing of NAFTA and still 87% of the raw materials are imported into Mexico which means there is still not a real supplier base in Mexico,” mentions Mendoza. This lack of local supplier base only highlights the market opportunities that exist in a manufacturing-focused country like Mexico. Through market and supplier collaboration efforts to optimize costs, it only becomes a discussion of competitive advantage through specific business case analysis.
Learn more Prodensa insights on supplier base opportunities in Mexico in the full interview.
“Every project is different, each company will need to analyze their own business case and then analyze the best location for them, especially regarding labor availability and cost, and then put enough attention to generate a good working environment to develop a good operation,” says Alvarado. “Mexico is still a really great location with many opportunities due to lack of domestic suppliers. Prodensa has helped many clients analyze and eventually move with their suppliers, not by adding pressure to do it but by developing win-win scenarios for market competitiveness,” adds Mendoza.
Competitive analysis through supplier network rationalization should be an ongoing activity for manufacturers in North America, agrees both Alvarado and Mendoza. “It has never been easy to search for new suppliers due to the audit process and negotiations. More than a shift for new suppliers, we see a trend of adding additional options for suppliers, just in case,” mentions Mendoza. Although this strategy could work in the short-term to avoid disruption to supply chains in a shifting market, it may not be sustainable. “The tendency is costly for the sourcing team as well as time-consuming to maintain relationships and expectations in quality standards.” As the long-term relationship with client-supplier might be shifting due to changing market conditions, the most secure and cost-effective strategy is to collaborate within and across industries.
Prodensa´s seat at the table
Prodensa is a management consulting firm focused on providing business case analysis and global manufacturing strategy through our own experience of administering manufacturing plants in North America. As a company being involved in the USMCA renegotiation, we can guide clients through the current socio-political landscape and provide quality market intelligence for strategic client decisions.