Border adjustment tax would see costs heaped on automotive industry

04 September 2017 Consultancy.uk

With the increasing prospect of a border adjustment tax on vehicle related imports, automotive producers face between $1,000 and $1,800 in additional fees per import, depending on the production cost of vehicles, as found by a new study. The reshoring of the work to the US is unlikely to see investment recouped within a reasonable timeframe for most parts.

The rise to power of billionaire tycoon Donald Trump was partly on the back of his insistence that the auto industry in the US was getting a raw deal from neighbouring nations, largely as a result of the NAFTA free trade agreement. The now incumbent President of the United States has not acted on his pledges so far, more recently mollifying his original statements as a range of sectors, from manufacturers to governments, continue to warn of the repercussions.

The US auto industry is a major player in the country’s economy, with automakers and their suppliers currently responsible for 3% of America's GDP. No other manufacturing sector generates as many American jobs, suggesting a period of contraction may have dire consequences for the US economy in the long-term. The Donald Trump administration has talked for some time of increasing tariffs to boost the domestic auto market and put consumers off investing in imported vehicles – however the likely effect of tariffs would see the domestic market stung by inflated prices for parts and maintenance, costing manufacturers between $21.6 billion and $23.8 billion.

NAFTA trade flowsNew analysis, this time by the Boston Consulting Group, commissioned by the Motor & Equipment Manufacturers Association (MEMA), explores the effects of border adjustment tax (BAT) proposed by the president on the automotive parts industry. The report, titled ‘Impact of BAT and NAFTA Reforms on the U.S. Motor Vehicle Industry’, has found that trade flows around vehicles from the US vehicle industry vary considerably between types, vehicles or parts, as well as net imports and exports. Canada is the biggest export market for US vehicles and parts, totalling $44 billion. Imports from Canada, however, result in a net balance of -$13 billion, largely due to the import of vehicles. Mexico too shows higher levels of imports over exports, with net imports of vehicles totalling $51 billion and parts totalling $21 billion.

The biggest segments for import into the US from Canada is passenger vehicles and parts, at $46 billion and $9 billion respectively. From Mexico, imports are broadly split between passenger vehicles, heavy-duty trucks and parts, at around $25 billion. The US sold considerable numbers of parts to both Canada and Mexico, amounting to $17 billion and $16 billion respectively.

Economics of reshoring parts production

A range of parts and the respective cost of reshoring production to the US were also analysed. The result, calculated with a 15% BAT rate, varies drastically. For one potential component of a vehicle interior, a $50 million investment would see overall costs rise by an estimated +$2 per unit, with various cost reductions in freight and BAR unable to offset labour cost increases – there would therefore be no long-term payback on such an investment.

For another interior vehicle part considered by the firm, the payback on a $50 million reshore investment would be around 9 years. Moreover, total savings when considering freight and BAR costs amount to a net boost of ~-$11 per unit, even when considering labour cost additions.

The firm also considered the total additional cost to manufactures of vehicles for 12 OEMs across the US market. The increase in average costs from the introduction of a BAT of 15% would see ~$1,025 added to the cost of production. Two of the surveyed OEMs would benefit from the introduction, while the majority would incur some form of additional cost – recouped from profit or passed on to consumers.

Effect of BAT added to production costs

The story becomes even more expensive in a 20% BAT case, average cost increases would amount to ~1,800 across the 12 OEMs considered, with only one being able to benefit from such an introduction, while 5 OEMs would be above average, ranging from $2400 to $4,400.

BCG researchers noted that, in addition to making production considerably more expensive, the US would likely see a net decrease in employment in the sector, with between 20,000 and 45,000 at risk according to the firm’s analysis.

“President Trump has said that he wants to increase jobs in America and put forward tax reform and trade policies that are in the best interest of American businesses, consumers, and workers,” Steve Handschuh, President and CEO of the MEMA said. “The objective of tax reform and NAFTA renegotiation must be to strengthen US manufacturing competitiveness, and MEMA is working hard to make sure this objective is met.”

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Four ways digitalisation is transforming car brands and dealers

16 April 2019 Consultancy.uk

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”