DETROIT -- Long before the pistons for General Motors Co. V-6 engines reach the automaker’s plant near Detroit in Romulus, Mich., they are seasoned international travelers.
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,” said Jim Bovenzi, GM’s executive director of global supply chain on a recent tour of the Romulus plant. “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 have used the 25-year-old North American Free Trade Agreement 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, 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 percent in the third quarter and 1 percent 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.
Journey of a piston
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 engine blocks -- the heart of the V-6 engine -- each come from either a GM casting operation in Saginaw, Mich., 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.”
Marriage of parts
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.
As individually labeled V-6 engines move down the line -- for Cadillacs and Acadias -- about 200 parts from 88 different suppliers are attached. Fifty-eight are American, 12 Mexican, 5 Canadian and 13 from elsewhere.
Spring Hill workers install an automatic transmission from a GM plant in San Luis Potosi, Mexico, a starter and generator made in Tennessee by Japanese supplier Denso Corp., an air conditioning compressor made by Denso in Michigan, a drive belt made by Gates Industrial Corp. in Mexico, tensioners and a pulley made by Gates in Canada, converters made in Tennessee by Tenneco Inc. and battery cables from China.
Ford and Fiat Chrysler, alongside other major automakers such as Japan’s Toyota Motor Corp. and Nissan Motor Co., all have built up similar international supply chains to support their North American assembly operations.
The lower costs achieved by such diverse sourcing means better margins on higher-priced vehicles like the Cadillac XT6. The crossover retails for $55,490, almost $20,000 above the average U.S. new car price, and is one of GM’s higher-margin vehicles.
The use of lower-cost countries for more labor intensive parts is now “part of the recipe to compete in the global market,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Michigan.
European automakers, for instance, have similarly moved production of parts to cheaper, tariff-free countries within the European Union.
Tearing up NAFTA or imposing tariffs would hurt U.S. automakers’ competitiveness, according to Dziczek.
CAR estimated in June that the average price of a U.S.-made vehicle would rise $1,100 if Trump carried out his threat of levying tariffs of up to 25% on Mexican imports over illegal immigration.
North American tariffs would force automakers to move sourcing of lower-cost parts from Mexico to other cheap markets like Vietnam, Dziczek said.
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.”
After Ford Motor Co. and General Motors ended production of compact cars, many former car owners continued to purchase sedans instead of switching to crossovers and SUVs, according to an Edmunds analysis.
So far in 2019, 23 percent of former Chevy Cruze owners and 31 percent of former Ford Focus owners bought a car from a competitor, the online car sales website said in a report Wednesday.
"Ford and GM made a strategic decision to prioritize profit at the expense of market share," Jessica Caldwell, Edmunds' executive director of insights, said in a statement. "While this may set them up better in the long run so they have the cash they need to fund electrification and autonomy, there's no question that decision is giving their competitors an edge now."
Former Focus owners' brand loyalty declined over the last three years from 40 percent in 2016 to 33 percent through September 2019, the report said. Former Cruze owners' loyalty declined from 57 percent in 2016 to 45 percent in 2019.
The study showed 21 percent of Focus and 22 percent of Cruze trade-ins go toward the purchase of a compact car, many of those cars being Honda Civics or Toyota Corollas.
"The number of Focus and Cruze owners trading their vehicles in and buying a small Jeep [Compass or Renegade], Hyundai Kona or Elantra, Kia Forte or Subaru Crosstrek have all risen in the last three years," the study said.
In an emailed statement to Automotive News, GM spokesman Jim Cain said: “Chevrolet trucks and crossovers are offsetting lower car sales. The proof is in registrations, and registrations don’t lie. Dig deeper and you’ll see that key competitors -- Ford, Nissan, Toyota, Jeep and Chrysler, among others -- are losing significant chunks of retail market share. We’re doing fine.”
The study said 21 percent of Cruze owners and 18 percent of Focus owners traded in their cars for the corresponding brand's crossovers or SUVs in 2019. Edmunds analysts said the cost increase of a small crossover or SUV — between $4,000 and $8,000 more than a small car — puts pressure on younger and "price-sensitive" buyers.
"The catch is, if Ford and GM don't have affordable options for shoppers who are buying their first or second new car, it could be much harder to win them over later," Caldwell said in the statement. "Catching consumers early and keeping them in the family has been a basic tenet of automotive brand strategy for decades.
"It feels like we're in the midst of a transformative time for the industry where automakers are being forced to rethink everything," she said.
SHANGHAI — PSA Group and Fiat Chrysler Automobiles, in hatching plans to merge and create the world’s fourth-largest automaker, say they will not close factories.
They can probably keep such a promise in most markets, but not with China.
PSA and FCA each operate joint ventures with local peers in China, but all of the partnerships are in dire need of restructuring and downsizing.
While PSA and FCA haven’t disclosed how they plan to integrate their global operations, one of PSA’s two Chinese partners has decided to break ties with the French automaker.
On Oct. 28, three days before PSA and FAC disclosed the merger, Changan Automobile Co., based in the Southwest China municipality of Chongqing, placed its 50 percent stake in Changan PSA on the market via a local exchange that trades corporate assets and other equity.
Changan, which also runs an unprofitable joint venture with Ford Motor Co., can’t wait to free itself of the financial burden under the PSA partnership.
Changan PSA was established in 2011 in the south China city of Shenzhen to build and market Citroen DS cars. It has been bleeding losses ever since launching output in 2013.
As of September, the joint venture has racked up 4.9 billion yuan ($703 million) in losses over time, according to information disclosed by Changan.
PSA has largely failed to establish Citroen DS as a premium brand in China as it planned to do.
As a result, the joint venture, which can build up to 200,000 vehicles a year, has never sold a meaningful number of vehicles. Annual sales peaked in 2014 at around 23,000. In 2018, the number shrank to less than 4,000.
In the first three quarters of this year, Changan PSA only sold 2,030 vehicles, according to the China Passenger Car Alliance, a Shanghai-based consultancy.
After Changan disclosed plans to offload the stake in the joint venture, PSA’s China office said in a statement last week that the DS brand will “receive significant development” in China instead of exiting the market.
Given the extended downturn in China’s new-vehicle market, who might be interested in taking over the 50 percent stake in Changan PSA from Changan?
The most likely candidate would be Dongfeng Motor Group.
Dongfeng also operates a joint venture with PSA. In addition, it also holds a 12.2 percent stake in the French automaker.
Incorporating DS models in its product mix would allow the joint venture, Dongfeng Peugeot Citroen, to make a better use of factory capacity.
Dongfeng Peugeot Citroen, formed in 1992 in the central China city of Wuhan, produces and distributes Peugeot cars and Citroen’s lineup, except for the DS lineup.
Behind volumes generated by new models, especially crossovers such as the Peugeot 2008 and 3008, Dongfeng Peugeot Citroen’s annual volume reached a record high of 704,000 vehicles in 2015.
But the joint venture’s sales have since shrunk as other global automakers such as General Motors and Nissan Motor Co. add crossover models.
Dongfeng Peugeot Citroen operates four plants capable of annually churning out a combined 840,000 vehicles at full capacity, yet sales fell 33 percent to around 253,000 in 2018. In the first nine months of this year, deliveries plunged 56 percent to 91,049.
As the sales slump accelerated, Dongfeng Peugeot Citroen lost more than 2.5 billion yuan in the first half alone, according to the latest available financial information Dongfeng has revealed on the joint venture.
Like PSA, FCA’s China operations face challenges.
FCA in 2010 established a joint venture with GAC Motor Co. in the central China city of Changsha, which initially built cars for the Fiat brand. The partnership enjoyed robust growth from 2016 to 2017 on volumes generated by three locally produced Jeep models — the Cherokee, Renegade and Compass.
But the sales boom was short-lived for GAC FCA: Their plants in Changsha and the south China city of Guangzhou combined can produce up to 328,000 vehicles annually.
With the market slipping and other global brands such as Volkswagen launching more SUVs in China, sales at the joint venture quickly ran out of steam.
In April 2018, GAC FCA launched the fourth locally assembled Jeep model, the Grand Commander. Yet annual deliveries of the big SUV slumped 39 percent in 2018 to less than 125,200, according to GAC.
Neither FCA nor GAC discloses financial results for the joint venture. But such a small volume made it impossible for the joint venture to be profitable.
GAC FCA is FCA’s main business in Asia Pacific. Largely because of sales decline at the joint venture, FCA’s operations in the region finished 2018 with an operating loss of 296 million euros, versus an operating profit of 172 million euros in 2017.
The joint venture’s sales have dropped another 46 percent to 52,372 in the first three quarters of 2019.
Both PSA and FCA are operating at a small portion of their local production capacity as overall vehicle demand in China remains subdued amid a weakening economy.
The two automakers, looking to revive the operations, probably have no way out but to shut down some of the underutilized plants they run with local partners.