Trump's first week spells trouble for auto industry

Chris Woodyard | USA TODAY

Show Caption Hide Caption Trump hosts US carmakers CEOs at the White House US President Donald Trump meets with CEOs of GM, Ford and Chrysler, and reiterates his commitment to bringing jobs back to America. Video provided by AFP

In a single week, President Trump's assertion of his more protectionist "America First" trade policy already holds massive implications for the auto industry.

A week that began with a cordial meeting with the CEOs of Detroit's Big 3 automakers ended in a diplomatic dispute with Mexico, a key trading partner and home to many auto plants that supply cars to the U.S.

His administration floated the idea of a tariff or border tax to pay for a wall between the U.S. and Mexico. He made it clear that he has his sights set on a renegotiation of the North American Free Trade Agreement.

As automakers ballyhoo every new auto job they bring to the U.S., the fact remains that the entire industry is globalized and built around the notion of open trade. Automakers build cars overseas to sell in multiple countries, including the U.S. They also build cars in the U.S. to sell in other countries.

The same holds true for the thousands of parts needed to make a single car. Parts suppliers send components across international borders to the assembly plants. They return as part of the finished cars.

Traditional boundaries between countries have been disappearing when it comes to the auto industry, says Dave Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor, Mich. Now, under Trump, "the big issue for the new administration is ... trade."

Car buyers in the U.S. may not pay attention to the window stickers, but if they did, they might be surprised to find out where their cars were made. Many come from countries like:

• China. The Buick Envision compact SUV and Volvo S60 Inscription sedan.

• Turkey. Fiat Chrysler has been importing its Ram ProMaster City vans from Turkey. Ford used to make its compact van there, the Transit Connect, but production has moved to Spain.

• India. Ford plans to bring its latest SUV, the EcoSport, from India. It will likely be the first Indian-made vehicle from a major maker in the U.S. market.

Trump met with Ford CEO Mark Fields, General Motors CEO Mary Barra and Fiat Chrysler CEO Sergio Marchionne on Tuesday to push his calls for more job creation in the U.S. and to offer the prospect of less regulation, which could help drive industry profits. But by Thursday, Mexican President Enrique Pena Nieto had canceled a planned White House visit amid disputes over the building of a border wall and Trump's calls for Mexico to pay for it.

Trump's next step could be to seek renegotiation of NAFTA, which erases trade barriers with Canada and Mexico.

The Center for Automotive Research, in a new report, says a withdrawal could result in "higher costs to producers, lower returns for investors, fewer choices for consumers and a less competitive U.S. automotive and supplier industry." Mexico exported 55% of the vehicles from its factories to the U.S. last year.

Mexican workers are paid far less than their U.S. counterparts. But facing sky-high costs for new factories, automakers decide to build vehicles for more reasons than labor rates. And Mexico ships cars not just to the U.S. but to Central and South America.

Cars from a single factory are sold in multiple countries because it's so expensive to have to retool a plant for every new model. The only way to make the plant profitable is to spread the cost over as many vehicles as possible. Scale is everything – and factories can't make money unless they are running at or near full capacity. Automakers' U.S. plants, for instance, ran at 94% of their capacity last year, the Center for Automotive Research says, leaving little room for internal expansion.

"The industry desperately needs large production runs of vehicles," says Ian Beavis, chief strategy officer for consulting company AMCI Global. "It's never just for one country."