How the US trade war and tariffs affect the automotive component industry?
Introduction
The trade war initiated by the United States is significantly impacting costs in the automotive component industry and has triggered a widespread search for suppliers capable of avoiding the tariffs threatened by Donald Trump. This situation is increasing the level of uncertainty in the market because while tariff announcements are applied immediately, affecting short-term competitiveness, companies have to position themselves and make decisions that, at best, affect the medium term.
Apparently, Donald Trump’s objective is to rebuild local value chains, but this requires enormous investments, long-term horizons, and a certain stability in the rules of the game. Large investments require more than five years, longer than a political cycle, and initially involve even more imports, also subject to tariffs. If companies suspect that the tariffs will be reversed with the next change in administration, they will have no incentive to make risky and costly capital commitments.
Currently, the best alternative seems to be having production facilities in Mexico. Thanks to the USMCA (United States-Mexico-Canada Agreement), the trade agreement between the United States, Mexico, and Canada, companies can avoid tariffs and maintain cost competitiveness without compromising the quality and service of components for automotive clients. In this article, we explore why sourcing from Mexico is the best strategy and how Ecenarro can help you reduce the risk and uncertainty of your project.
What products has the United States imposed tariffs on or threatened to?
In recent months, the United States has implemented tariffs on various imported products, particularly from regions or countries such as the European Union and China. In addition to sectors like metallurgy or electronic components, it has mainly affected the automotive component industry with 25% tariffs on European products. The new round of US tariffs increased tariffs on China by 145%.
Mexico, however, has been excluded from the latest tariff announcement, as has Canada. Both countries are covered by the USMCA, which establishes favorable trading conditions.
Products manufactured in Mexico that meet the requirements of the treaty will remain exempt from tariffs, while those that do not comply will be subject to 25% tariffs in the case of automotive components. This situation puts production plants located in Mexico at an advantage compared to other economies that will face higher costs to access the North American market.
Key advantages of having a supplier with manufacturing in Mexico.
Having a Mexican supplier offers significant advantages for automotive Tier suppliers located in North America. Mexico is an attractive option for companies seeking to maintain their competitiveness without sacrificing quality.
- USMCA Benefits: This treaty allows for tariff-free trade between the United States, Mexico, and Canada, provided that value regeneration requirements in the territory are met, as Ecenarro does.
- Competitive Production Costs: Manufacturing in Mexico offers competitive labor and operating costs, which, combined with European technological expertise, creates a very appealing combination for Tier 1 or Tier 2 automotive suppliers with global needs.
- Geographic Location and Supply Chain Efficiency: Proximity and presence in the North American market become a strategic advantage by reducing delivery times and optimizing logistics compared to Chinese or European options. You reduce the risk of obsolescence and fluctuations in maritime transport costs.
- Exchange Rate: Transactions are conducted in US dollars, thus avoiding fluctuations in local currencies and exchange rate variations of the Euro and the Yuan.
- Industrial Infrastructure: Mexico has a skilled workforce and continuously improving communications, facilitating an efficient supply chain. It also allows for scaling operations according to business needs.
How to reduce risks when switching from a Chinese or European supplier to a Mexican supplier?
The key aspects to consider when switching from a European or Chinese supplier to a Mexican source of supply are the following:
- Have a global supplier with experience in the automotive market, with more than 10 years of production experience in Mexico and knowledge development in Europe.
- It is important that they have engineering resources and the capability to ensure robust production processes that avoid risks in launching new developments and components in Mexico.
- That they have production resources equivalent to those in Mexico in other locations to support continuous improvement and temporarily cover potential incidents at the beginning of Mexican production.
- In addition to their core technology, that they integrate complementary secondary operations in Mexico to reduce costs and improve production lead times.
- That they have a long-term orientation and a clear commitment to development and permanence in the North American market.
- That they have the capacity for future investment and the backing of a business group such as the Mondragon Group.
Conclusion
A new trade balance will be generated in business with the US. Faced with this, companies have two options: one is reactive and defeatist, which has a very short lifespan, and the other is the one we choose at Ecenarro, which is resilience and action in the search for solutions and alternatives.
From our plant located in Celaya, Guanajuato state, we offer a competitive product based on cold forming technology, with engineering and knowledge developed over decades in Europe, ensuring robust and high-quality processes. Our world-class production facilities, such as the forming and machining equipment we use in our Mexican plant, position us as a preferred partner for Tier 1 or Tier 2 automotive companies seeking a specialist supplier of ball joints, bushings, shock absorber pins, wheel bolts, and steel pinions or gears made by cold heading.
If you want to explore how we can collaborate, contact us and let’s talk about how we can be your strategic partner in the North American market.