Industry analysts warn aftermarket suppliers change is coming
Chicago—For the first time in her 30 years of being in the Capitol, Ann Wilson heard something she never had before.
“A senior White House staffer looked me in the eye and told me, ‘Your reality of how you’re organized with parts coming into this country will change and your industry needs to find out how to bring jobs back into the U.S. — that’s our goal, to have you reshore.’”
Wilson, MEMA senior vice president of government affairs, had been in Washington D.C. recently for a meeting with White House and Trump personnel. The purpose was to introduce the new administration to MEMA’s (Motor & Equipment Manufacturers Association) role in the industry and to discuss possible trade tariffs and a Border Adjustment Tax (BAT), as both would have considerable impact on the aftermarket.
In light of stalled health care reform, the president needs a “win,” either with changes in tax reform or trade policy, which are two important issues for MEMA’s AASA (Automotive Aftermarket Suppliers Association) division members, said Wilson, who was part of a panel discussion, “Trump Effect: The Big Picture on Government Policy and What to Expect,” during the AASA Vision Conference, themed “The New Aftermarket Reality,” in Chicago.
“There’s a jockeying for position between the House and the White House as to who will take the lead on tax reform and put together a package that can make it across the finish line,” she said. “The Border Adjust Tax will likely be part of it. This will not be a sprint, it’s going to be a marathon.”
The BAT could be 20 percent and, where NAFTA is involved, there might also be a “backdoor tariff,” Wilson said. “The dynamics of how we operate in a global environment are going to change.”
Panelist Daron Gifford, an automotive consulting specialist at Plante Moran Financial Advisors, said the BAT might range anywhere from 35 percent to as high as 45 percent on imported aftermarket products, resulting in higher production costs, lower profits and higher consumer prices. Companies may choose to avoid the BAT by reshoring manufacturing to the U.S., but that, too, has consequences.
With U.S. labor costs and relatively high tax rates, there must be a financial incentive to reshore, he said. “Whether it’s a BAT or tariff, and prices escalate, manufacturers must examine if it makes sense to reshore production and consider potential savings in transportation costs and increasing wages abroad.”
Cost of materials would be similar, but wages will undoubtedly be higher, Gifford said, up to a multiplier of three, resulting in lower profits, despite avoiding the BAT.
There’s a carrot and stick approach in play with the Trump Administration, and perhaps there’s more stick being used, Wilson said. “We have to define what the carrot might be for the industry. If a company thinks reshoring is not viable, then they need to let [AASA/MEMA] know, and what their circumstances are.”
The industry is entering into a period where it has to be nimble and prepared, said panelist David Hamill, a trade expert at Arent Fox. “Every company has to assess all possible scenarios. It’s like being in the War Room and drawing up all potential situations for whatever happens — we’re in a very fluid situation.
“It’s coming. And you better be prepared for it.”
Whatever policies are ultimately installed, they will last well beyond the Trump Administration, Wilson said. There hasn’t been tax reform in 30 years, and if the administration executes it, it won’t be done again for a long time other than small tweaks. “It must be kept in mind that with these trade agreements they are trying to create pillars that will be kept and moved forward with each and every coming trade agreement. There will be too much invested legislatively for a new president to come in and make changes. It’s easier to pass something than it is to repeal it.
“It’s a multi-year issue.”
Automotive represents 25 percent of the U.S. trade deficit, of which one third are imported OEM and aftermarket parts, Gifford said. “The aftermarket will be pulled into whatever decisions are made — there won’t be any exceptions.”
The aftermarket has to engage in discussion and define its opportunities and path toward the objective of bringing manufacturing back, Wilson said.
“That’s the bottom line.”