Guest Column: Entrada

What Are Auto Suppliers To Make of USMCA?

USMCA will put upward pressure on wages for auto suppliers in Mexico. But the pact’s requirement of a greater percentage of North America-originating content in vehicles should also make Mexico's cost-competitiveness more attractive.

By:

JP McDaris Business Development Director Entrada Group Ph. 512-300-8383 E: jpmcdaris@entradagroup.com

Back on July 1, USMCA came into force after more than 26 years under NAFTA in North America. While USMCA keeps intact a zero duty rate for almost all goods, the new pact will aect the automotive industry more than any other sector, with specic provisions for compliance, hourly wages, rules of origin and steel and aluminum inputs.

In fact, many industry observers feel the new agreement has the potential to fundamentally change the relationship between OEMs and suppliers in the auto sector, as they must work together more closely to verify both origin and percentage of North American content contained in each vehicle, in addition to meeting hourly wage minimums.

“USMCA requires a higher percentage of content to be manufactured in North America versus NAFTA. This makes Mexico-based producers very attractive, due to their cost-competitiveness.”

With so much devil in these details, Entrada recently delivered an exclusive, clients-only webinar, led by our longtime Mexico-based law rm, Cacheaux Cavazos & Newton. Based on that webinar, here are three key aspects of USMCA that auto suppliers operating in Mexico, or contemplating a Mexico footprint, need to be aware of.

About Entrada Group

Entrada Group guides international auto sector manufacturers in establishing and running their own cost-competitive Mexico operations. Half of the clients in our two Mexico manufacturing campuses supply to the auto sector. This article is based on a presentation delivered to Entrada clients in July 2020 by Cacheaux Cavazos & Newton, Entrada’s legal provider. To learn more about how USMCA may aect your operations or to access the entire recorded presentation, please contact Entrada Group.

Visit us: www.entradagroup.com

Hourly Wage Increase

USMCA introduces the rule of “Labor Value Content,” (LVC) under which 40% of the value of the content of light vehicles and 45% of the content value of pickup trucks must be manufactured by workers earning an average salary of $16 or more per hour. In the US and Canada, this minimum should have little eect. But in Mexico, the requirement could signicantly impact cost and protability structures, particularly for small-to-midsized automotive producers already experiencing tight margins. According to Inegi, Mexico’s national statistics and geographical institute, less than one percent of Mexico’s 54 million workers earn at that level, so wage increases of two to three times current levels are possible.