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US-Mexico border delays could hurt automakers' just-in-time inventory

The auto industry is monitoring delays at the U.S.-Mexico border that could impact automakers' inventories if auto parts are not delivered on time.

"The industry remains concerned that many border agents have been moved away from commercial crossings and dispatched elsewhere along the border, which is causing a slowdown," the Auto Alliance, which represents automakers that operate in the U.S., said in an emailed statement to S&P Global Market Intelligence.

The delays follow U.S. President Donald Trump's April 6 announcement that he was redeploying 750 border agents from their assignments at ports of entry to focus on border security and migrants seeking asylum by illegally crossing the border. On April 9, three main ports of entry on the U.S.-Mexico border were experiencing wait times of two to four hours, according to U.S. Customs and Border Protection.

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In 2018, the U.S. imported $82.50 billion worth of vehicles and auto parts from Mexico and exported $20.83 billion to Mexico.

Jonathan Smoke, chief economist at Cox Automotive, wrote in a report that Mexico is "arguably the most important U.S. trading partner for the automotive market, both for fully-assembled vehicles and, even more importantly, for parts that go into vehicles assembled in the U.S."

In the April 8 report, Smoke said 15%, or 2.5 million units, of new vehicles sold in the U.S. in 2018 were assembled in Mexico. In 2018, 53%, or 8.95 million units, were assembled in the U.S.

"What is uniquely challenging about a disruption in the free flow of goods across the U.S.-Mexico border is how heavily American-based manufacturers depend on Mexico for final assembly," Smoke wrote, adding that the majority of vehicles assembled in Mexico are American brands.

General Motors Co.'s GMC brand and Fiat Chrysler Automobiles NV's Ram brand have about 40% of their U.S. sales from vehicles assembled in Mexico, Smoke said.

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GM, Fiat Chrysler, Ford Motor Co. and Toyota Motor Corp. deferred comment to the Auto Alliance statement.

The auto industry relies on cross-border trade and sometimes "auto parts make several border crossings before being integrated into a vehicle's final assembly," the alliance said.

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business, said border delays could impact auto manufacturers that utilize just-in-time inventory, where manufacturers receive goods only as they are needed in the process.

Automakers used to keep supplies for a month or two, but now it is closer to a day or two.

"The best way to make a profit is to minimize your inventory, which means don't carry too much," Dhawan said in an interview. "So any delays at the border that will cause a problem will impact car sales."

Auto manufacturers could decide to idle certain plants if they have to wait longer than normal to receive supplies.

"If the assembly line is idle, they're losing money," Dhawan said, adding that a five-hour delay or one-day delay should not cause many problems, while longer delays could halt assembly lines.

"That means you have to pay your labor force just for standing in the factory," Dhawan said.

Instead, automakers could choose to reduce the number of shifts, which means workers — especially non-union hourly employees — will not be getting paid.

"That then ripples through the economy where these [plants] are located," Dhawan said.

The Auto Alliance said "any disruption to the flow of commerce resulting from a border slowdown will have a cascading effect — harming U.S. consumers, threatening American jobs and investment, and curtailing the economic progress that the administration is working to reignite."