Long before the pistons for General Motors Co V-6 engines reach the U.S. No. 1 automaker’s Romulus, Michigan plant, they are seasoned international travellers.
Powdered aluminum from Tennessee is shipped to Pennsylvania and forged at high temperatures into connecting rods for the pistons, which are then sent to Canada to be shaped and polished. They are then shipped to Mexico for sub-assembly and finally the finished pistons are loaded onto trucks bound for Romulus to become part of a GM V-6 engine.
The parts make four international border crossings in all, without a single tariff levied.
“They already have their passports,” Jim Bovenzi, GM’s executive director of global supply chain on a recent tour of the Romulus plant, told Reuters. “We look at North America as a borderless region. We have parts and components coming back and forth across the border all the time.”
GM’s V-6 engine is just one example of how GM and rivals Ford Motor Co and Fiat Chrysler Automobiles NV have used the 25-year-old North American Free Trade Agreement (NAFTA) to shift work to lower-cost facilities across the continent, cutting expenses and boosting returns from the region that represents the bulk of their global profits.
U.S. President Donald Trump now seeks to replace NAFTA with the new United States-Mexico-Canada Agreement (USMCA), signed by the countries’ leaders last November, which he says will boost American jobs.
U.S. automakers have lobbied hard for the new treaty to preserve NAFTA’s effective lack of borders, and say they can work with it because it does just that.
However, if Trump follows through on his repeated threats to pull the United States out of NAFTA if the U.S. Congress does not ratify USMCA, automakers would be forced to pay a patchwork of tariffs under World Trade Organization rules.
That would destroy the cost advantages of their cross-border supply chains – which include U.S. companies employing American workers – and would likely force automakers to redesign their manufacturing models and find cheaper alternatives elsewhere, industry experts say.
The uncertainty means automakers and manufacturers are holding off on key investments.
“A lot of our production is very, very capital intensive and when you’re deploying that much capital you want to have a clear sense of what the rules are,” said Everett Eissenstat, GM’s vice president for global public policy. “It’s quite important for us to get those (USMCA) rules in place so we can have some stability and predictability to continue to produce and invest here in the United States.”
U.S. business investments fell 3% in the third quarter and 1% in the second quarter, due to concerns over mounting trade tensions, including the issue of NAFTA and tariffs worldwide.
“Businesses are already becoming more cautious about investments,” said Michael Gregory, head of U.S. economics at BMO Capital Markets. “If we get to the point where the administration is actively talking about tearing up NAFTA, I think that would trump any concern about China.”
Democrats, who are pushing for more labor and environmental protections in the new treaty, say they are making progress toward passing USMCA in 2019. But if that does not happen, it risks being postponed in 2020 ahead of the next presidential election, which would mean an extended period of uncertainty.
GM’s Romulus Powertrain plant makes about 400,000 V-6 engines a year for high-margin Cadillac SUVs, light pickup trucks and other GM vehicles.
The pistons that end their long journey there are only a small part of the 70-plus trucks bearing parts such as engine blocks or cylinder heads, that arrive there daily.
The Romulus-built V-6 uses 235 parts from 100 primary suppliers. Sixty-seven ship from factories in the United States, 13 from Mexico, 8 from Canada and 12 from elsewhere in the world. Most of the electronics come from Asia.
All told, GM spends $71 billion a year on materials, sourcing 133,000 different parts from 3,100 primary suppliers.
At Romulus, five trucks daily carrying 288 100-pound (45 kg) engine blocks – the heart of the V-6 engine – each come from either a GM casting operation in Saginaw, Michigan, or a supplier in Mexico.
The Mexican parts are cheaper, GM’s Bovenzi said, but using dual suppliers reduces the risk of relying on one plant for a critical part like the engine block.
The more labor intensive it is to make, the more likely a part is sourced from Mexico, according to James Rubenstein, a professor of geography at Oxford, Ohio-based Miami University who has studied the automobile industry and NAFTA.
“Final assembly costs don’t affect the overall cost of a vehicle that much,” he said. “Focusing on labor-intensive parts further down the chain is what really makes a difference.”
When the V-6 engines – now weighing around 500 pounds – are unloaded at GM’s Spring Hill plant near Nashville, an even bigger marriage of components takes place.
The pistons that end their long journey there are only a small part of the 70-plus trucks bearing parts such as engine blocks or cylinder heads, that arrive there daily.
The Romulus-built V-6 uses 235 parts from 100 primary suppliers. Sixty-seven ship from factories in the United States, 13 from Mexico, 8 from Canada and 12 from elsewhere in the world. Most of the electronics come from Asia.
All told, GM spends $71 billion a year on materials, sourcing 133,000 different parts from 3,100 primary suppliers.
At Romulus, five trucks daily carrying 288 100-pound (45 kg) engine blocks – the heart of the V-6 engine – each come from either a GM casting operation in Saginaw, Michigan, or a supplier in Mexico.
The Mexican parts are cheaper, GM’s Bovenzi told Reuters, but using dual suppliers reduces the risk of relying on one plant for a critical part like the engine block.
The more labour intensive it is to make, the more likely a part is sourced from Mexico, according to James Rubenstein, a professor of geography at Oxford, Ohio-based Miami University who has studied the automobile industry and NAFTA.
“Final assembly costs don’t affect the overall cost of a vehicle that much,” he said. “Focusing on labor-intensive parts further down the chain is what really makes a difference.”
When the V-6 engines – now weighing around 500 pounds – are unloaded at GM’s Spring Hill plant near Nashville, an even bigger marriage of components takes place.
That would be bad for Mexican suppliers, but would also hurt U.S. suppliers and defeat Trump’s aim to boost U.S. jobs, as shuttling parts back and forth between Asia and the United States would not be cost effective.
“If we weren’t getting it from Mexico, we’d be getting it from somebody else’s ‘Mexico’,” Dziczek said. “And the further away that ‘Mexico’ is, the less likely it is American suppliers would benefit from that business.”
(Reuters)
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