ROMULUS, Mich. (Reuters) – Long before the pistons of General Motors' Co V-6 engines reach the Romulus (Michigan) plant of US automaker # 1, they are experienced international travelers.
A partially assembled V6 engine used in a variety of General Motors cars, trucks and crossovers will drive down the production line on August 21, 2019, at the GM Romulus Powertrain facility in Romulus, Michigan. The picture was taken on August 21, 2019. Rebecca Cook
Tennessee aluminum powder is shipped to Pennsylvania and forged at high temperatures to connecting rods for the pistons, which are then sent to Canada for molding and polishing. They are then shipped to the subassembly in Mexico, and finally the finished pistons are loaded onto trucks destined for Romulus as part of a GM V-6 engine.
The parts form a total of four international border crossings without a single customs duty being levied.
"They already have their passports," said Jim Bovenzi, global supply chain manager on a recent tour of the Romulus plant. "We see North America as a borderless region. We have parts and components that constantly drive over the border.
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 to cut costs and increase revenue from the region, which accounts for the bulk of their global gains.
US. President Donald Trump is now trying to replace NAFTA with the new agreement between the United States, Mexico and Canada (USMCA), which the Heads of State and Government signed last November and which he believes will improve jobs in the US.
US. Automakers have stood up for the new contract to preserve the effective lack of boundaries in NAFTA and say they can work with it because it does just that.
However, if Trump complies with his repeated threats to pull the US out of NAFTA if the US Congress does not ratify the USMCA, automakers would be forced to pay a patch of tariff under World Trade Organization rules.
This would destroy the cost benefits of their cross-border supply chains – which include American companies employing American workers – and likely force automakers to redesign their manufacturing models and find cheaper alternatives elsewhere, industry experts say.
Uncertainty is causing automakers and manufacturers to hold back important investments.
"Much of our production is very, very capital intensive, and if you use so much capital, you want to have a clear overview of the rules," said Everett Eissenstat, GM vice president for global public policy. "It is very important for us to implement these (USMCA) rules so that we can continue to produce and invest a degree of stability and predictability here in the United States."
Corporate investment declined 3% in the third quarter and 1% in the second quarter as concerns of increasing trade tensions, including NAFTA and global tariffs, persisted.
"Businesses are becoming more cautious in terms of investment," said Michael Gregory, head of the US economy at BMO Capital Markets. "If we have reached a point where the government is actively talking about the disruption of NAFTA, I think that would clear up any concerns about China."
Democrats pushing for more labor and environmental protection in the new treaty indicate progress towards the adoption of the USMCA in 2019. However, if this does not happen, there is a risk that it will be postponed until 2020 before the next presidential election what would mean a longer period of uncertainty.
JOURNEY WITH A PISTON
GM's Romulus Powertrain plant produces around 400,000 V-6 engines annually for high-margin Cadillac SUVs, light pick-ups, and other GM vehicles. A small portion of the over 70 trucks with parts like engine blocks or cylinder heads that arrive there on a daily basis.
The Romulus-built V-6 uses 235 parts from 100 major suppliers. Sixty-seven ships from factories in the US, 13 from Mexico, 8 from Canada and 12 from other parts of the world. Most electronics come from Asia.
In total, GM spends $ 71 billion a year on materials and purchases 133,000 different parts from 3,100 major suppliers.
At Romulus, there are five lorries daily with 45 kg engine blocks – the heart of the V-6 engine – either from a GM foundry in Saginaw, Michigan, or from a supplier in Mexico.
The Mexican parts are cheaper, said GM boss Bovenzi, but the use of two suppliers reduces the risk of reliance on a critical part such as the engine block.
The more labor intensive it is, the more likely a part of Mexico will be sourced, according to James Rubenstein, a professor of geography at Miami University in Oxford, Ohio, who studied the automotive industry and NAFTA.
"The final assembly costs do not affect the total cost of a vehicle so much," he said. "Focusing on labor-intensive parts further down the chain really makes all the difference."
MARRIAGE OF PARTS
When the V-6 engines – which now weigh around 500 pounds – are in operation at GM's Spring Hill facility Being unloaded near Nashville there is an even greater mixing of components.
While individually labeled V-6 engines are coming down the line – for Cadillacs and Acadias – there are about 200 parts from 88 different suppliers. Fifty-eight are Americans, 12 Mexicans, 5 Canadians and 13 from other countries.
Spring Hill workers install an automatic transmission from a GM plant in San Luis Potosi, Mexico, a Tennessee-made starter and generator from Japanese supplier Denso Corp., a Denso-made air conditioning compressor, a Gates-made industrial drive belt Corp Plc in Mexico, tensioners and a pulley from Gates in Canada, converters from Tenneco Inc in Tennessee and battery cables from China.
Ford and Fiat Chrysler, along with other major automakers such as the Japanese Toyota Motor Corp and Nissan Motor Co, have built similar international supply chains to support their assembly in North America.
The lower cost of such disparate sourcing means better profit margins on higher priced vehicles such as the Cadillac XT6. The SUV costs $ 55,490, nearly $ 20,000 above the average price of new cars in the United States. He is one of the higher-margin vehicles from GM.
The use of low-wage countries for more labor-intensive parts is now "part of the competitive recipe on the world market," said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research (CAR) in Michigan.
Similarly, European automakers have shifted the production of parts to cheaper, duty-free countries within the European Union.
According to Dziczek, the NAFTA's ordeal or the imposition of tariffs would undermine the competitiveness of US automakers.
CAR estimated in June that the average price of a US-made vehicle would increase by $ 1,100 if Trump threatened to impose tariffs of up to 25% on Mexican imports for illegal immigration.
North American tariffs would force automakers to relocate cheaper parts from Mexico to other cheap markets like Vietnam, Dziczek said.
That would be bad for Mexican suppliers, but it would also hurt US suppliers and defeat Trump's goal of strengthening jobs in the US, as shuttling parts between Asia and the US would not be cost effective.
"If we did not get it from Mexico, we would get it from another 'Mexico'," said Dziczek. "And the further away Mexico is, the less likely it is for American suppliers to benefit from this business."
Report by Nick Carey in Romulus, Michigan; Editors of Joseph White and Bill Rigby