Suppliers may halt Mexico investment plans

If there's one thing a CEO hates, it's uncertainty.

Will President Trump tear up NAFTA, torpedo the corporate average fuel economy or trigger a trade war with China? Until they find out, automotive suppliers might be tempted to delay any big decisions.

For now they can sit tight. U.S. vehicle sales have leveled off after a six-year boom, so most suppliers aren't struggling to eliminate production bottlenecks.

"We don't anticipate a change coming soon," said one senior executive of a major global supplier, who asked not to be named. "We're continuing to invest in our factories" in Mexico.

But the executive is worried about the long-term prospects for the North American Free Trade Agreement. His company has highly automated plants in Canada and the U.S., while Mexican factories produce components with a high labor content.

Workers at Mexican supplier plants earn $2.61 an hour, compared with $19.91 for their American counterparts, according to the Center for Automotive Research.

If Trump were to slap a high tariff on Mexican-made parts, suppliers might move their plants to Asia rather than the U.S.

"Our customers don't want to pay extra for U.S. content," the executive said. "It could make us uncompetitive. We'd face threats from Asian suppliers."

Other suppliers appear to be growing nervous about the potential hit to North America's robust tariff-free trade in automotive components. In 2014 Mexican auto parts exports to the U.S. totaled $39 billion, according to the Center for Automotive Research, while parts imports from U.S. factories amounted to $21 billion. Each automaker oversees hundreds of supplier factories on both sides of the border.

Any threat to that complex network can throw suppliers into a tizzy. 

In October, a quarterly supplier confidence index published by the Original Equipment Suppliers Association dropped to 48, down from 50 in July. A score below 50 means suppliers expect a slowdown within the next 12 months. It was the most pessimistic outlook since global auto production was disrupted by the Japanese tsunami of 2011. Though the survey was completed before the election, many suppliers said it was NAFTA's future that had them worried. 

While Trump sorts out his trade policies, suppliers may decide to sit on their wallets, warned Charles Chesbrough, OESA's senior economist. 

"It's really up in the air," Chesbrough said. "If companies put their investment plans on hold, it could kick the economy into a recession."