Supply Chain Resilience Key to the Future of a Global and Local Automobile Market


Image credit: General Motors


by Sarah Goldfeder
CGAI Fellow
February 2022




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Supply Chain Resilience Key to the Future of a Global and Local Automobile Market

The past five years provided a cascade of unique circumstances that required North American manufacturers to think differently about how to manage their supply chains. The trend towards restrictive rules of origin as a part of managed trade agreements, investor and consumer expectations on environmental, social and governance (ESG) requirements and fast-encroaching timelines to reduce carbon emissions have all led companies to look to localize their supply chains. In many cases, they have used joint ventures and memorandums of understanding to vertically integrate.

The United States economy has undergone a generational change, in large part due to aggressive engagement in free trade, which led to easy consumer access to lower cost goods. In the wake of the hollowing out of its industrial cities and the loss of manufacturing jobs, American politics has led to a push towards protectionism. Nowhere was that more clearly apparent than in the rules-of-origin requirements for the automotive sector in the renegotiation of the North American Free Trade Agreement (NAFTA), now more appropriately just an agreement identified by all three countries with their own equities listed first (USMCA/CUSMA/TMEC).

The agreement not only introduced higher regional value content (RVC) thresholds, but also mandatory requirements to produce core parts within the region, mandatory steel and aluminum purchasing requirements and a labour value content requirement. In the wake of the agreement’s implementation (July 1, 2020) then-United States Trade Representative (USTR) Robert Lighthizer identified a stricter interpretation of the qualification formulas for the regional value content than had been initially agreed upon. After her confirmation as USTR, Katherine Tai upheld the stricter interpretation. The pressure to comply with the new understanding has led some original equipment manufacturers (OEMs) to request alternative staging regimes. In addition, after repeated attempts to convince the USTR of the initial agreement, Mexico and Canada requested a dispute resolution panel.

Regardless of the outcome of the dispute panel, OEMs have undertaken efforts to conform with the stricter interpretation, especially as they look to identify new supply lines for new fleets of electric vehicles (EVs). While the United States government hashed out the more restrictive labour and regional value contents, the industry itself has had to consider future investment to support a massive reinvention. The transition to zero-emission vehicles, pursued within public policy as well as industry, in parallel with the trade agreement, has required companies to invest massive amounts (more than US$82 billion in North America alone) in a manufacturing restructuring that has never been seen before.

Globally, OEMs have had to identify and invest in new facilities, processes and supply chains while, at the same time, continuing to produce traditional internal combustion engines in the middle of a series of supply chain disruptions. The pandemic can be blamed for some of these disruptions, but the underlying foundation of the entire industry is also in flux and demands a level of agility the past three years have been unable to provide.

The sector’s future will further entrench three separate global manufacturing hubs: one in Asia, one in Europe and one in North America. Suppliers will be asked to meet the needs of these three geographies locally, not by the historic preference of sole-sourced, scaled up, hub-and-spoke supply chain infrastructure. That extends to upstream sources of critical minerals and rare earth elements and their processing, as well as the traditional fabrication of the interior textiles, hardware and software that comprise a passenger vehicle.

The beauty in this restructuring is that the industry is in many ways still developing these technologies and remains on a relatively level playing field within certain markets. One exception to this is in Asia where China’s aggressive move towards electric vehicles has given those OEMs that operate in that market an edge in development, engineering and sourcing. In the future, the more that any one OEM operates in multiple markets, the more that company will be insulated from supply chain shock, like that felt in the early days of 2020.

The issue of critical mineral and rare earth element sourcing remains an area of tension. The industry’s historic reliance on processed mineral materials from the Indo-Pacific region will shift, with OEMs looking to establish processing facilities closer to the cell manufacturing facilities, which in turn are moving closer to battery packaging plants. The physical consolidation of the complete supply chain from mineral to battery facilitates management of carbon costs, labour concerns and RVC requirements.

Canada, like the United States, is undergoing comprehensive government and private sector reviews of its supply chain health. The 100-day supply chain review the White House released in 2021 clearly signalled a move to localized development of supply chain pieces that have previously been the Indo-Pacific’s purview. That same calculus is playing out in Canada, with the focus being on the attraction of investment and the placement of Canada as on par with the United States in the ever more competitive battle for development. The two countries are co-operating in a Joint Action Plan for Critical Minerals, with a number of bilateral working groups working out what an ethical, sustainable and reliable North American supply chain for critical minerals and rare earth elements looks like in practice.

Expanding investment into regional supply solutions for regional markets only makes sense. This is especially true in North America. As concerns arise regarding the ethical conduct of the mining companies that supply the raw materials to the processing facilities, and in turn, to the methods used to process extracted, recycled or reused minerals into battery cell-ready materials, accountability becomes ever more important. OEMs are both looking for new opportunities and being careful as they enter new partnerships with suppliers. Localizing the process provides daylight for regulators. In addition to supplying proximity and the resulting transparency, it also minimizes shipping requirements, which in turn reduces cargo costs and carbon emissions. Diversifying the options by market will be a particular advantage for globally present OEMs with operations in more than one region. The resiliency will come not only from localizing supply chains, but also by necessary redundancies to satisfy regional operations.

The future of the auto sector will be both global and local. Innovation, especially in establishing circular economies and increasing efficiencies, has no borders. In the automotive sector, it has often been initiated in the Indo-Pacific region, perhaps because the factors squeezing manufacturing are more keenly felt and the timeline into the EV transition is far advanced beyond North America. The generational change now taking place requires not just new investment but new thinking, in both product and process. Coming to the table now, as a global economy, with an eye towards efficient, ethical and sustainable practices, will ensure the continued development of the interconnected, rules-based trading environment that ultimately provides geo-political stability.


About the Author

Sarah Goldfeder is a government relations and strategic policy professional with experience in both government and the private sector. She is currently part of the public policy team at General Motors Canada. Her high-level insight on the strategies of engagement with both the U.S. and Canadian governments, including how the two countries work together on important issues, was honed through experience in both the public and private sectors. Sarah was a Principal at the Earnscliffe Strategy Group in Ottawa for more than five years, focused on advising clients on trade, supply chain, and issues of industrial policy. Previous to that served as Special Assistant to two U.S. Ambassadors to Canada, fostering bilateral relationships at the most senior levels.

Sarah is a North American nomad, with a father from Brooklyn, a mother from Chicago, and a life lived in eight states, six countries, and three continents. She calls the American West her home, having studied at the University of Oregon in Eugene, Oregon and Colorado State University in Fort Collins, Colorado.


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