NEW YORK, Aug. 03, 2017 (GLOBE NEWSWIRE) -- The North American Free Trade Act (NAFTA) could undergo radical changes at the hands of the Trump administration. Even though many trade experts argue the legislation is obsolete because it excludes important sectors, such as services, finance and largely digital companies, a renegotiation of NAFTA – or at the extreme, withdrawal – could reduce net income for U.S.-based companies with North American supply chains by $9 billion.
According to the latest Bain & Company report, Is Your Supply Chain Ready for a NAFTA Overhaul?, in the 23 years since the adoption of NAFTA, U.S., Mexican and Canadian companies have been designing their supply chains for a trade regime of minimal cross-border barriers. However, potential changes to NAFTA have left companies wrestling with a high level of uncertainty about the ultimate outcome and consequences.
As a result, many leadership teams are reluctant to act, but Bain cautions that waiting for a clear sense of the future is the riskiest of all options.
“Leadership teams can limit the negative consequences of NAFTA withdrawal and currency moves by adopting an approach that anticipates future scenarios,” said Rodrigo Rubio, head of Bain’s Mexico City office and co-author of the report. “This approach applies to companies based in Mexico and Canada, as well as other countries, such as China, with trade agreements that may be vulnerable to U.S. policy changes.”
Bain’s analysis reveals that a complete withdrawal could reduce the net income margin of companies in the automotive, agricultural and textile industries by as much as 1 percentage point (assuming no pass-through of higher costs to consumers). Companies in these industries tend to rely heavily on imported parts, components and raw material from Mexico or Canada traded at NAFTA terms.
Industries likely to feel the least harm, with no more than a 0.1-point reduction in the net income margin, are aerospace, metals and mining, pharmaceuticals, and oil and gas, which have very few NAFTA-related imports from those countries.
Companies that develop a strategy for these uncertainties now will be able to pivot faster than the competition when NAFTA details become clearer, thereby minimizing supply chain risk.
Bain advises that when planning actions for potential outcomes, companies should pair each action with a signpost that triggers it. Companies can choose among three types of action:
- No-regret moves. Some actions will increase a company’s competitive edge no matter what scenario plays out. They include improving cost management or operational effectiveness in procurement, supply chain and inventory management. NAFTA renegotiations heighten the urgency to look for new operational efficiencies, as they give companies greater flexibility to face new treaty restrictions.
- Options and hedges. Leadership teams that develop strategic options and hedges for a variety of future scenarios navigate better when new developments unfold. These could include expanding procurement options or increasing the volume sourced from competitive local suppliers. One option today is automating operations to some degree. If NAFTA is repealed, it would be easier to move a partially automated production line back to the US, compared with a highly manual line.
- Big bets. The most challenging balancing act involves large-scale investments that have different payoffs depending on how the future plays out. Any company that keeps its supply chain and manufacturing footprint plans for North America may be making a big bet, and management teams should assess their investments from this perspective. Companies could go even further by expanding U.S. production capacity or switching suppliers from foreign- to U.S.-based companies. If a big bet looks too risky to take immediately, companies can wait for greater clarity and move quickly once signposts point to likely changes ahead.
“The impact of any NAFTA negotiations and the effects on supply chain speeds, costs, and inventories won’t be felt for several years, but companies that take a ‘wait-and-see’ approach will immediately fall behind,” said Joe Terino, an expert in Bain’s Supply Chain Practice and the report’s co-author. “By focusing on the risks that matter most and incorporating change into the strategic process now, companies gain the ability to correct course quickly, regardless of what new or revised trade deals unfold.”
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