How Free Trade Influences an Automotive Supply Chain

Production costs, transportation costs, and product quality are all primary considerations in corporate sourcing and production decisions. However, customs duties and other trade tariffs can also be critical inputs into these supply chain decisions, particularly when preferential treatment is an option. Trade duties and regulations vary by country and industry. And the automotive industry has the perfect combination of supply chain and customs complexity that makes the management of customs duties potentially rewarding, but also extremely complex.

MIC Customs Solutions introduced me to one of its automotive industry clients. This large automotive manufacturer uses MIC’s origin calculation system when analyzing sourcing and production scenarios for evaluating new vehicle launches and ongoing production thereafter. The planning process is detailed, cross-functional, and extensive.  Trade tariffs are only one consideration in the process, but can be substantial enough to influence final sourcing and even production location decisions.  Perhaps most impressive is the detailed information management process the company uses to evaluate these sourcing and production business cases.

Automotive Manufacturing and Country-of-Origin Evaluation

This automotive company’s process for evaluating new production business cases includes the upfront concept phase, information technology alignment, and the sourcing and production decision-making phase.  Local content feasibility and assembly layout are evaluated during the concept phase. Local content projections evaluate options for sourcing parts local to a potential production facility or from a region that is part of a free trade zone. It may turn out that feasible duty exempt options are available, or it may be that sourcing outside of the free trade area and paying customs duties turns out to be superior. Qualifying for preferential treatment under free trade agreements (FTA) requires that a certain percentage of parts qualifies for preferential treatment, as well as a certain percentage of sub-assemblies. For example, an FTA may stipulate that at least 60 percent of the value-add for a given part or component must come from the local area to qualify for preferential treatment. Then there are the same or similar threshold criteria for sub-assemblies and then ultimately the entire vehicle must meet the threshold to qualify for duty exempt import into the consumer market. These requirements that go back multiple tiers into the supply chain require strong corporate controls, information management, traceability, and detailed reporting capabilities.

The information management process at this automotive manufacturer requires the collection of country-of-origin data in addition to standard BOM information from suppliers.  The BOM information stored in the ERP system then needs to be communicated to the origin calculation system. However, the BOM for each model has variability across individual vehicles, greatly expanding the material information management requirements and complicating the projection of total duty exemptions. For example, some colors may have paint or interior sourced from different regions. There are also other vehicle options substantial enough to influence whether a vehicle will qualify for duty exemption. What I found most impressive about this process is that the local content is not only projected for a make and model, but also subsequently calculated individually for each vehicle around the time of production. For example, if a plant produces 200 vehicles in day, the local content calculation is performed 200 times in that day.

Final Word

As I noted in a recent post, many companies incorporate duties and tax costs right down through the bill of materials when analyzing various production and sourcing decisions. The automotive supply chain is subject to the criteria (complex supply chain, regulatory complexity, substantial preferential treatment options) that justify the evaluation of numerous sourcing and production scenarios. At the same time, the information management complexity and the potential financial payback justify the investment in global trade management (GTM) solutions to support the analytical and reporting processes required. I am impressed by the thorough planning process this automotive manufacturer performs prior to strategic production decisions. However, I am most impressed by the fact that the country-of-origin and preferential treatment calculations are performed for each individual vehicle at the time of production. This is a great example of an organization obtaining, maintaining, and leveraging supply chain data from the concept phase through to final production.

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