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Analysis

Macro Challenges Lead to a Stronger Supply Chain

By Sofía Garduño | Wed, 09/21/2022 - 13:20

The effects of the COVID-19 pandemic, the Russia-Ukraine conflict, and the trade war between the US and China have led automotive companies to face disruptions due to the rising costs and the availability of raw materials. A transformation of the supply chain is imperative to face these challenges, experts say. 

 

“All companies are suffering from high prices, especially in the automotive sector. Compared to these crazy high prices, it almost feels like COVID-19 was easier to solve,” said Udo Storck, Managing Director, Masterfoam Group, to MBN. 

 

Procurement strategies have become an increasingly important issue for OEMs. The hostile trade environment is forcing automotive players to find new strategies to strengthen their supply chain and make it more resilient. “Automotive customers are becoming increasingly open to planning because they belong to one of the industries that has probably suffered the most during these last two years of pandemic-related disruption,” said Boris Franchomme, Managing Director, Sparx Logistics.

 

Nearshoring has become an attractive option for many following the increasing popularization of regionalization, rather than globalization. The recent crises have shown that having a closer supply chain helps companies to ensure the continuity of their operations. Mexico has benefited from this situation as it offers companies a space to scale up their businesses within the North American market. This has been possible specifically after the enactment of the new USMCA treaty, which pushed North American companies to substitute Asian imports through stricter regional value content (RVC) norms that rose from 62.5 percent to 75 percent. Although there are controversies around the interpretation of the rules of origin, the US, Canada and Mexico are collaborating to reach an agreement by the end of December 2022. 

 

USMCA has also put labor rights under the spotlight thanks to the implementation of a Rapid Response Mechanism for complaints made by member companies against others due to a breach in the treaty’s stipulations. This is leading to a shift in worker representation, which would lead to fairer conditions for Mexican workers to freely elect their union and actively participate in decision-making processes. Contrary to NAFTA, which only included a side agreement on labor, USMCA features labor obligations as part of the core of the agreement, which makes them fully enforceable, according to the US Department of Labor.  

 

Industry experts agree that this mechanism was essential for the evolution of the automotive industry. “It was necessary to include a chapter regarding labor in USMCA. This mechanism has been effective and provides confidence,” said José Zozaya, Executive President, AMIA, to MBN.

 

Although Mexico has benefitted from USMCA from an automotive perspective, there are other issues regarding the treaty that might put the sector at risk. Recently, the US initiated consultations against Mexico as it claims that the Mexican policy is affecting US companies in the energy sector. Canada backed this decision but it is representing its own perspective and interests. Consultations started on Aug. 24, 2022 and if no agreement is reached, a dispute resolution panel will have to be established. AMIA warned that if the panel rules against Mexico, the economic repercussions could affect the automotive supply chain and Mexico’s transition towards electromobility. 

Sofía Garduño Sofía Garduño Journalist & Industry Analyst