Ahead of the Curve: Forecasting Corner: The World Re-Regionalizes

As the global automotive industry faces yet another crisis, this one man-made, the U.S. tariff/trade restructuring effort underscores critical structural shifts. Several governments have and will continue to intensify the “build where you sell” position. As such, they are using both the carrot (tax incentives to grow employment) and the stick—exemplified by tariffs to drive their agenda.

An enabler to this co-location of production (and a bolstered supply base in tow) is the shift towards battery electric vehicle (BEV) technology. As mainland China continues to lead the world in BEV production (17 million BEVs & REEVs in 2030 or ~53% of total production volume) and technology, other regions (namely the European Union and the U.S.) are seeking to adopt BEV technology. These countries see an opening to attracting more employment/tax base as BEV output drives a different ecosystem.

As governments pursue a new localized value-add agenda, it is important to take a step back and survey the drivers of vehicle import/export flows. This is where the “re-regionalization” enters the picture. Back in the 60s and 70s the global automotive industry was actually regional in structure:  The Detroit 3 in North America; Europe’s collection of super OEMs (Peugeot, Renault, VW and Fiat); with Japan and Korea’s growing players. Initially, these OEMs exported their vehicles to gain a foothold in foreign markets, though eventually, through tariffs, cost and currency factors, all of these OEMs co-located production outside their home markets. 

Despite the myriad of plants which were built abroad, there still remains a healthy number of vehicles shipped region to region. These are known as inter-regional vehicles. As these and other OEMs globalized, they expanded their footprint for high volume vehicles though focused the home region output for specialty/low volume nameplates.

As markets such as China, U.S. and the European Union maintain or become more protectionist (especially as electrified vehicles gain favor), what is the future of inter-regional vehicle flow?   

At S&P Global Mobility we have an inter-connected forecast where we track light vehicle sales globally by production region. The world is divided by seven vehicle regions: North America, China, Japan/Korea, Europe, Middle East/Africa, South America and lastly, Southeast Asia. Over a 30-year period, vehicle flow historically has changed little. In 2000, roughly 15% of global light vehicles were interconnected. This rose two share points to 17% in 2010 and dropped one point to 16% in 2020. In essence, the overall rate has been quite stable though the story is beneath the waves. According to the S&P Global Mobility Light Vehicle Sales Forecast Import Module, our 2030 forecast may rise to over 17% inter-connected volume. Why is this rising through this decade and not declining? It’s the China factor.

Over the 30-year period, mainland China’s share of global inter-connected volume is surging from virtually zero in 2000 to ~4% of global volume. Several factors are driving this. Growth of China OEMs in the European Union and Russia may reach 9% of Europe’s volume by 2030. The shift importance cannot be underestimated. Even with several China OEMs building plants in Europe, almost 9% of their volume is slated to be imported from China.

Japan and South Korea are declining as sources for imports, though are still sizeable. The 30-year shift from over 8% of global volume in 2000 to ~5% in 2030 outlines the challenges that Japan and Korea will have as plants are built abroad and China continues to dominate export growth. Similarly, North America had started to emerge as an export source to the world (reaching 1.5% of global volume), though this level is starting to deteriorate as cost, vehicle mix and geopolitics outline a retrenchment.

Within the U.S., there is an opportunity to re-regionalize. The graphic outlines the state of play between major regions in 2024. The trade between Japan and the U.S. favored Japan at a 76:1 ratio with over 1.3 million vehicles exported last year. Lower yet still significant, South Korea trade with the U.S. dominated trade at a 30:1 clip last year with 1.4 million units going to the states. Lastly, the EU (plus the United Kingdom) were net exporters at a nearly 5:1 ratio. It should be no surprise that the Trump Administration is focused on closing these gaps. 

It is apparent that outside of the earlier outlined mainland China factor, the rest of the world is trying to re-regionalize. Fast forward to today, many countries eye the benefits of incremental manufacturing jobs and lack of global trade dependency through increased internal volume. An emerging challenge is the potential lack of economies of scale and ecosystem efficiency. Additionally, a byproduct is that while regions are becoming more internal, so are the OEMs. This lack of demand diversification is not optimal for global OEMs are their volume re-regionalize to home markets.

Why is this shift important for MEMA supplier members?  As the industry re-regionalizes it will drive differing economies of scale and potentially a new global OEM order. For instance, smaller OEMs such as Mazda, Subaru, JLR or even the premium German OEMs may find it difficult to locate a full-scale, multi-nameplate plant in every major region – building the majority of their portfolio in every region. The previous strategy of locating a facility abroad and augmenting the portfolio from the home production hub may increasingly not make economic sense given tariffs and incentives. Suppliers will need to support more nameplates with fewer volume per nameplate— driving part/assembly complexity, lower economies of scale and requiring enhanced flexibility. As such, several OEMs—which today ship a high unit volume from their home market—may require to collocate more volume outside their home region to these newer "build and sell" markets.