Outbound foreign direct investment for U.S. auto suppliers
INSIGHT ARTICLE |
By the end of 2016, U.S.-based companies had a cumulative $5.56 trillion invested in foreign countries.1
Foreign direct investment (FDI) by the United States in the transportation equipment sector was second only to Japan and Germany, when measured in job creation; in 2015, U.S. FDI in the sector accounted for 33,600 jobs.2 This contributed to a three-year trend that made transportation equipment the leading sector for FDI globally. That year, automotive was the leading sub-sector for global FDI, and the United States was among the top destination countries—second only to Mexico, and followed by India, China and Morocco.
The future for growth in the automotive industry, however, may be found in emerging markets. With auto sales slowing in the United States after a record-setting period of growth,3 sales from emerging markets are expected to account for 60 percent of global sales by 2020.4 Sales in these markets are expected to grow 5 to 6 percent per year until then.
For auto suppliers, this means aligning their production bases in markets where OEMs are establishing or expanding operations around the world—that is, following a generally required “build it where they buy it” approach. For middle market auto suppliers, understanding exactly what is required regarding FDI in unfamiliar regions or countries can be challenging. From the availability of skilled labor in Thailand to consumer preferences in France to production logistics in India, suppliers must be mindful of the obstacles unique to each country while keeping an eye out for opportunities to add value and efficiency.
Additionally, local regulations and compliance requirements often change the cost and operating models of U.S. auto suppliers when manufacturing or selling overseas. Acquiring a deep understanding of the local “doing business in” rules―and assessing their impact on the company’s business―is critical before finalizing a decision to set up in a new country.
Where are US auto makers investing?
According to the RSM 2016 Automotive Monitor, more than half of U.S. auto suppliers are likely to have international expansion plans. Following is a look at the top destination countries and regions for U.S.-based companies, for which transport equipment is second only to tourism for outbound foreign investment:5
- China: If the government in China follows through on lifting its requirement that overseas carmakers form joint ventures with local companies in order to operate in China, the country will become more appealing for foreign investment than it has been since the restriction was put in place two decades ago.6 In 2016, production of cars and commercial vehicles rose by 14.5 percent over the previous year, keeping the country solidly in first place in world motor vehicle production.7 Moreover, changes in the country’s robust new energy vehicle (NEV) program could keep China in the lead as the world’s largest market for electric vehicles, with foreign participation in the NEV market being encouraged by the government plan.8
With parts and labor being relatively inexpensive—and with tariffs that force companies to produce products in China in order to sell there—the country is seeing an increase in operations by foreign entities. GM, Ford and Volkswagen plan to shift more R&D to China, and Ford chose China over Mexico and Michigan to produce its Focus compact cars.9
Looking ahead, Asian countries such as Thailand and Vietnam could chip away at China’s lead as auto companies move operations to these countries.
- Mexico: As a top destination country for transportation equipment production in 2015, Mexico is playing an increasing role in North American automotive parts production (which saw a total of 17.95 million motor vehicles produced that year).10 Many suppliers are either planning to bring production facilities or have already set up operations in the country to take advantage of its low labor costs, duty-free exports11 and close proximity to the U.S. market. But suppliers are also in Mexico because the OEMs have already opened or will be opening assembly plants there.
- India: As the world’s fifth-largest producer of motor vehicles in 2016, India is on track to become the world’s third-largest auto market within the next decade. Since 2000, the country’s auto industry has attracted foreign investment worth nearly $16 billion from countries around the world. India is vying to be a hub for electric vehicles—Tata Motors is developing them there—and the government is promoting eco-friendly vehicles. Kia is making major investments in a greenfield facility.12 But the country’s road to growth is not without its bumps: Ford backed out of its plans to produce a compact car in India; GM plans to stop selling cars there (although it will continue to produce them there);13 and Tesla has delayed plans to sell cars in India.14
- Central and Eastern Europe: Amid concerns regarding Brexit and possible government-imposed penalties regarding diesel fuels, the United Kingdom, the second-largest car market in Europe after Germany, is experiencing its longest run of declines in passenger car sales since 2011.15 But the European Union overall remains a significant market for automotive suppliers, and one of the most dynamic in terms of the new technologies and trends affecting the industry. Despite a 2015 diesel scandal, VW Group dominated car sales in the EU in the first eight months of 2017, accounting for nearly a quarter of sales.16 U.S. suppliers serving customers in the EU or contemplating entering that market should consider EU members located in Eastern and Central Europe as solid options to consider for operations in manufacturing and distribution, as the auto industry dominates the FDI in these regions.17 While labor costs have increased significantly over the past two decades, the automotive industry has invested in the area, infrastructure has been improved and there is access to highly skilled labor.
Gaining an advantage
There are a variety of challenges that companies face when going global: currency fluctuations, worldwide demand, logistics, personnel considerations, economic concerns, financing and political issues. With proper due diligence, suppliers investing offshore can be prepared for the long haul.
Due to tight labor markets in many countries, a skilled workforce can be difficult to find. To replace an aging workforce, companies will try to attract and retain less-experienced workers, but competition for them—both within and outside of the auto industry—can be fierce.
Companies need to investigate the talent pools in the countries where they want to set up. Like any other asset, the workforce needs investments of time and other resources to keep it robust. Collaboration with local colleges and universities can create the pipeline of talent needed to establish and maintain operations; apprenticeship programs can identify and shepherd employees into manufacturing careers. Companies should offer training, provide competitive compensation packages and appeal to the values of the targeted workforce—in work arrangements, career guidance and professional culture, for example—in order to attract the skilled employees they need.
Production and logistics
There is a great deal of consolidation among suppliers: Rising costs helped drive a record-setting level of mergers and acquisitions among suppliers in 2015.18 The efforts of OEMs such as Nissan and Daimler-Chrysler to develop a shared platform or GM and Ford to co-develop a new 10-speed transmission are examples of efforts by suppliers to work together to shave costs. Standardization of foundational components creates a narrower supply chain which, for OEMs, translates into leaner inventories and lower carrying costs, supports just-in-time manufacturing and often results in lower costs per unit when ordering in greater quantities. Suppliers breaking into foreign markets would do well to collaborate with others to keep costs low and meet the needs of multiple OEMs looking for efficiencies in their supply chains. Suppliers will also need to consider and prepare for the potential of political upheavals, natural disasters and other external events to disrupt operations.
At the same time, suppliers should be prepared to convert their production lines as the need arises. The industry is cyclical and, as gas prices rise and fall, emission standards change or consumer preferences shift, so must the ability of suppliers to rapidly adjust accordingly.
Technology and analytics
There may be limited information technology resources available in some countries, so auto suppliers need to build applications and business-to-business infrastructures in the cloud so the requisite resources and support will be accessible even in remote locations. In addition, suppliers should expect foreign governments to establish requirements for rising technologies. Regulations mandating fuel efficiency standards and carbon dioxide emissions monitoring, for example, may not be the same overseas as they are domestically. Regulations on autonomous vehicles, vehicle-to-vehicle communications, on-board data systems and safety-oriented technologies, among other programs, also are being implemented or considered.
Suppliers are aware that consumer preferences change—and, as surely as night follows day, so do the production needs of OEMs. With the demands of countries changing as well, and, in the interest of sustainability, suppliers would do well to track and understand the long-term transportation strategies of their target countries. The Netherlands, Germany, France and the United Kingdom, for example, plan to implement bans on selling new gas or diesel-powered vehicles; some, such as Norway, plan to enforce these bans as early as 2025.19
Tax incentives and regulatory concerns
Before establishing offshore production, suppliers should understand the total cost associated with manufacturing overseas. In their zeal to lower labor costs, many manufacturers may overlook issues such as rising costs in transportation and logistics; longer cycle times; and product quality issues that can come with nondomestic production. A deep understanding of regulatory issues is also critical.
In addition, governments around the world are seeking to adapt their tax codes to address a falling tax base in the face of the changing global economy. As a consequence, transfer pricing between parent companies and their subsidiaries continues to be one of the most significant tax risk areas faced by multinational companies in the automotive industry. This has resulted in, among other initiatives, heightened scrutiny through the Base Erosion and Profit Shifting Action Plan (also known as BEPS). Going forward, multinational companies in the automotive industry should expect increased compliance requirements in most jurisdictions.
Setting a road map
The automotive industry has a long-term investment cycle. Decisions made today to expand will take some time to be completed and require a long-range view for the return on investment. Given the current length of the cycle, expanded capacity and overall global economic conditions, industry executives who are evaluating expansion should move forward with caution.
1The World Factbook, 2017, Central Intelligence Agency
2Global Location Trends 2016 report (Aug. 2016), IBM Global Business Services
3Isidore, C. “Auto sales are slowing, and upheaval is next” (May 16, 2017), money.cnn.com
4“The road to 2020 and beyond: What’s driving the global automotive industry?” (Aug. 2013), McKinsey & Company
5IBM Global Business Services
6Ying, T. et al., “China Carmakers May Be 'Destroyed' If Foreign Venture Cap Lifted” (Apr. 18, 2017), Bloomberg News
72016 Production Statistics, International Organization of Motor Vehicle Manufacturers
8“China's new NEV rules” (May 3, 2017), The Economist
9Bradsher, K. “Ford’s Signal to the Auto World: Here Comes China” (June 21, 2017), The New York Times
10Vehicle production in the NAFTA region, Statista
11Glinton, S. “Mexico’s Front Seat in the Global Auto Industry” (Jan. 16, 2017), NPR
12“Kia lines up three new cars for India debut” (Aug. 9, 2017), The Times of India
13Shirouzu, N., “General Motors to stop selling cars in India but not pulling out” (May 18, 2017), Reuters
14Riley, C., Iyengar, R. “Elon Musk says Tesla can't yet launch in India” (May 24, 2017), CNN
15Pitas, C. “UK sales fall 6% on Brexit, diesel concerns” (Sept. 5, 2017), Automotive News Europe
16“Selected passenger car manufacturers' European market share,” Statistica
17Lopatka, J. “No more low cost: East Europe goes up in the world” (July 25, 2017), Reuters
18Shepardson, D. “Auto supplier mergers, acquisitions hit record level” (Aug. 24, 2015), Detroit News
19Petroff, A. “These countries want to ditch gas and diesel cars” (July 16, 2017), CNN