With the announcement of the United States-Mexico Free Trade Agreement between President Trump and Mexico's President Pena Nieto, the first nail in the NAFTA coffin has been driven. The non-participation of Canada, thus far anyway, is a big outlier to anyone with any knowledge of geography or Big 3 cars. Yes, despite the lyrics to Journey's Don't Stop Believin', there is no South Detroit. If you drive dead south from Detroit you end up crossing the Ambassador Bridge to Windsor, Ontario, a town heavily reliant on the U.S.-based automakers. So, if NAFTA is really dead, there will be an awkward period of uncertainty until a deal is struck with the Great White North.
Markets are forward-looking discounting mechanisms, though, and analysts are now trying to gauge USMFTA's impact on auto stocks. The major impact on the auto industry would be the increase in local content requirements for tariff-free sales between the two countries from the 62.5% dictated in the original NAFTA agreement in 1994 to 75% in the new USMFTA. NAFTA gave automakers eight years to reach that 62.5% threshold, and while there has been no confirmation yet of a time frame in USMFTA, published reports have mooted a four-year transition period.
So that proviso, plus another requiring 40%-45% of labor to be performed by workers making at least $16/hour, would make it even more prohibitive to import parts on a large scale to North American factories. The key point of that last sentence is "even more prohibitive" because the car industry's move to just-in-time manufacturing -- of which I was a keen observer during my time as a sell-side autos analyst in the 1990s -- has made large scale foreign sourcing a thing of the past. Yes, there are components imported from China, mainly lower-value ones, but most of those are covered under the tariffs issued under USTR guidelines in the past three months.
Really, though, the company that seems (anecdotally, as local content reporting is notoriously unreliable) most dependent on parts imported from China is Tesla (TSLA) . I have no idea why Tesla does most of the things it does from a manufacturing perspective, and I am just as clueless as to the rationale behind their Chinese sourcing. While my contacts at the big car companies express admiration for Tesla's interior UX and motor-controlling software, I would not expect any of them to ape Tesla's sourcing practices.
So, I don't think USMFTA is a game changer for the U.S. auto stocks. You just don't buy them after the cyclical sales peak. As fantastic as consumer metrics have been of late -- including today's consumer confidence print from the Conference Board -- I do believe we have seen the peak in auto sales for this cycle.
There's always one caveat to that bearishness on the OEMs, though, and that is the potential for technological breakthroughs. In my experience most of those will come from suppliers, and a move towards a "Fortress North America" for carmaking really doesn't change that.
The progression toward autonomous driving (AVs) and vehicles powered solely by electric batteries (BEVs) is a very real one, in my opinion. I don't think there is a killer app in either segment just yet, and if you are listening to the pundits on CNBC who say that Tesla has massive leads in AVs or battery technology you really should turn off your TV and go outside (I do this regularly.)
It is the suppliers that will develop the killer apps, and I have mentioned a few in prior RM columns. On BEVs, the key is the move from gel-based electrolytes to a solid-side state electrolytic composition that will increase range and decrease degradation and charging time. I have mentioned Applied Minerals (AMNL) and their halloysite clay before, but this tiny little company based in Brooklyn, of all places, could just have the material that takes electrical batteries to the next level.
The pool is much deeper for AVs, but I love what Intel's (INTC) Mobileye is doing in syncing its native camera technology with LIDAR for consumer-based AVs, and the immense computing power required for such systems is going to drive demand for Nvidia's (NVDA) smart chips, even as their cryptocurrency mining businesses has tailed off.