Could supplier jobs move back to America?

Suppliers are waiting to see whether President Donald Trump will challenge the fundamental assumption that some auto parts can't be profitably produced in the U.S., even with a 35 percent tariff.

Products with high labor content, such as wire harnesses, small motors, cut-and-sew seat components and electronics, typically are produced in low-wage countries such as Mexico.

That's also standard procedure for automakers in Japan and Germany, which get their labor-intensive components from markets such as Poland, China and Vietnam, said Kristin Dziczek, director of the Industry, Labor & Economics Group at the Center for Automotive Research.

"Every major auto production region has a Mexico," Dziczek said. Suppliers choose low-wage countries to produce "commodities that aren't very complex to manufacture. That stuff is almost all gone" from U.S. factories.

The Trump administration's decision to renegotiate the North American Free Trade Agreement already is causing big headaches for suppliers, which cluster their factories around their customers' plants.

Ford Motor Co. recently killed plans to build an assembly plant in San Luis Potosi, Mexico. Meanwhile, Toyota and BMW say they will complete construction of their Mexico plants, although suppliers might be tempted to question the future of those projects.

But even if the Trump administration tears up NAFTA, it doesn't seem likely that all suppliers in Mexico will return to the United States.

For suppliers, profit margins on labor-intensive components are too thin to support U.S. wages. According to a CAR study published last August, suppliers in Mexico typically paid $2.61 an hour, while U.S. wages averaged $19.91. 

With such a large disparity, even a 35 percent tariff seems unlikely to make U.S. production practical, Dziczek said. Instead, suppliers likely would move production to low-wage countries such as Vietnam, China and Bangladesh. 

In part because of the wage gap, the U.S. imported $50.1 billion of automotive parts from Mexico in 2015, while exports totaled $30 billion, according to CAR. 

But it would be a mistake to assume that suppliers have abandoned the United States. More than 871,000 Americans are directly employed by automotive parts manufacturers, up from 734,000 in 2012, according to the Motor & Equipment Manufacturers Association, or MEMA. 

Just-in-time components such as seats, instrument panels, door panels and bumpers are manufactured near U.S. assembly plants. U.S. factories also make fragile parts -- such as body panels and air conditioners -- that are difficult to ship.

U.S. plants also manufacture complex parts that require a heavy investment in plant machinery, such as axles, tires and airbag inflators.

For example, Continental AG is building a $1.4 billion truck tire plant in Clinton, Miss. When that factory opens in 2019, Continental's investment in machinery will outweigh the cost of paying 2,500 workers.

Some suppliers prefer U.S. locations because it's easier for engineers to visit the plants and monitor quality.

After Gentex Inc. acquired HomeLink, the electronic garage-door opener marketed by Johnson Controls, it moved production from Mexico to Zeeland, Mich.

To be sure, Gentex is an exception. Nine of the last 11 assembly plants announced for North America are in Mexico, and many suppliers are building plants south of the border.

But those suppliers also are maintaining their U.S. production. From 2006 through 2015, suppliers invested $44.4 billion to expand or build new factories in the United States, according to CAR.

That expenditure easily outstripped suppliers' $3.4 billion investment in Mexico production for that period.

Suppliers have built a complex web of factories north and south of the border, and now they want to protect their investment, said Julie Fream, president of the Original Equipment Suppliers Association. 

"There has been a lot of concern that [the NAFTA treaty] will change in such a way that will make previous business investments uncompetitive," said Fream, whose organization represents more than 430 suppliers. 

Incoming Commerce Secretary Wilbur Ross has called Trump's proposed 35 percent tariff a last resort in case trade negotiations fail. 

Moreover, Ross has a firsthand knowledge of the complexities of North American auto production. A decade ago, Ross launched the International Automotive Components Group, an interior trim manufacturer with a network of eight factories in Mexico.

But it is not yet clear what the Trump administration will demand, and MEMA is seeking clarification.

"We have indicated that we are willing and able to sit down and have a conversation regarding the modernization of NAFTA, but that hasn't happened yet," said Ann Wilson, MEMA's senior vice president of government affairs. 

If Trump were to impose a tariff on imported parts, suppliers might shift some production to the United States and install more robots to mitigate labor costs. 

In fact, automation has caused greater overall manufacturing job losses than trade treaties, according to some studies. That trend is not likely to change even if NAFTA is renegotiated, said Daron Gifford, a partner at suburban Detroit consulting firm Plante Moran. 

"In 2017," he said, "it will be very rare to see rows of workers assembling things in U.S. factories."