Could More Cars Be Made In America After USMCA?

The North American trade agreement ratified last year could encourage more motor vehicle production in the U.S., a representative for BNSF (NYSE: BRK-B) said last month on a panel about the new trade deal's effect on the North American automotive market.

"As we look forward to the next decade, it will be very interesting — lots of change and lots of opportunities as we continue to support this market," said David Fleenor, BNSF assistant vice president for automotive, during a session at last month's annual Transportation Research Board meeting. The session was entitled "International Trade and Transportation Impacts of the USMCA in the North American Auto Industry."

The USMCA, the trade agreement between the U.S., Canada and Mexico that replaced the North American Free Trade Agreement (NAFTA), includes provisions that dictate how much of a vehicle's parts must originate from North America and what the wages should be for plant workers. These rules of origin include provisions for regional value content and labor value content. More information is available here.  

For instance, according to the USMCA, 75% of auto content must be made in North America by a certain time frame, with 40% to 45% of that content being made by workers who earn at least $16 an hour. 

Automakers have already considered these changes and adjusted production plans accordingly. In 2020, they have built from scratch, revitalized or reopened 16 assembly plants in the U.S., of which 12 or 13 will focus on electric vehicles, according to Fleenor. 

From 2019 to 2025, production volume in Mexico will likely be stable, while production could  slightly decline in Canada but significantly increase in the U.S. as automakers respond to USMCA, Fleenor said. 

"Clearly I believe the impact of the USMCA has driven the automotive industry to move their production growth back to the United States," Fleenor said.

However, Mexico will maintain its role as a major global supply of finished vehicles since the country has export agreements with other nations, he said. 

Although USMCA will incentivize automakers to produce more vehicles in the U.S., there are other factors that could influence rail's involvement in moving auto volumes. Stakeholders will need to watch how much the next generation of vehicle makers will alter traditional distribution channels, according to Fleenor.

Over 77% of the vehicles produced in North America move by rail at some point during the supply chain, Fleenor said. The eight major railroads of North America — the seven Class I railroads and Mexican railway Ferromex — have a joint pool of 65,000 dedicated railcars that they use to move motor vehicles from origin to destination. 

Traditional automakers use a dealer network to get vehicles to consumers, according to Fleenor. In this shipping model, an original equipment manufacturer loads vehicles from the factory onto rail and then those vehicles get unloaded at a rail terminal. A truck then ships vehicles to a dealer, who then sells them to customers.

But electric vehicle maker Tesla TSLA uses a different model. It sells its vehicles directly to consumers. As a result, its distribution model is predicated upon lower order quantities and faster delivery times, both of which tend to rely more on trucks to ship vehicles, according to Fleenor. 

While USMCA could affect vehicle production, additional factors come into play, according to other session panelists. Indeed, the COVID-19 pandemic and the subsequent auto manufacturing plant shutdowns and economic uncertainty were just some of the conditions affecting the North American vehicle market in 2020, said session panelist Karin Muller, director of customs compliance and trade governance for Magna International, an automotive supplier headquartered in Aurora, Ontario, Canada.

Other macroeconomic factors in 2020 were China's ascension as the world's largest auto market, the trend toward making motor vehicles become "mobile phones on wheels" and companies such as Alphabet, Amazon and Apple exploring future mobility business opportunities, according to Muller, who expressed similar thoughts on Magna's website.

Meanwhile, differing global emissions policies could also affect auto-related investments, according to panelist Peter Nagle, senior research analyst covering the global automotive market for market analysis firm IHS Markit.

"Going forward, luring new investment may be more difficult as U.S. and North American regulations diverge from stricter EU and Chinese emissions regulations," Nagle said.

Nagle also said Mexico could be less exposed to North American production trends because its production role as an exporter and importer of vehicles and components makes it more integrated with global vehicle markets.

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