Creating Competitive Advantage

The US auto industry isn’t going to become globally competitive by having government-created walls around the country. A continental supply chain can help

By Gary S. Vasilash

“We don’t need anything that Canada has. We don’t need anything that Mexico has, but they need everything that we have. And they have to treat us better.”

That was President Trump in June talking about the United States-Mexico-Canada Agreement (USMCA), an agreement he negotiated during his first term and which, at the time, he called “the fairest, most balanced, and beneficial trade agreement we have ever signed into law.”

Last week the Trump Administration announced it wasn’t renewing the trilateral trade pact. This doesn’t mean it is over, just that there will be annual reviews rather than letting it run for 16 years. (The verbiage is such that every six years the three countries meet in order to determine whether they agree to the extension. In this instance, the US decided against it, which requires the annual reviews.)

Without getting too political or economic about this, know, for example, that (1) in 2025 the US imported some $90 billion in crude oil from Canada, so obviously we do need something that Canada has and (2) Americans generally like to buy things that are low cost, so as there is a move away from sourcing goods found at places like your local Walmart from China, Mexico is becoming a more important source for those things, as well as a variety of other products.

Trade deficits exist because of macroeconomic reasons like consumer demand, a strong dollar, and global supply chains, not because one country is treating another country badly.

As then-Harvard Business School professor Michael E. Porter wrote in his landmark essay “The Competitive Advantage of Nations”:

“In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. . . . There are striking differences in the patterns of competitiveness in every country; no nation can or will be competitive in every or even most industries. Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic and challenging.”

Porter wrote that in 1990.

Has global competition decreased since then?

Is knowledge—whether this is the chemistry for a new battery or process knowledge of how to do a better job of making everything from cars to chips—any less important?

And note that he points out that “no nation can or will be competitive in every or even most industries” so it is important that there is a determination of what industries are key.

Porter recommends that industries and the companies within those industries be competitive, which is something that government protection doesn’t encourage.

He wrote—and remember, this is in 1990, when the US auto industry was facing increased competition from Japanese companies:

“Managed trade represents a growing and dangerous tendency for dealing with the fallout of national competitiveness. Orderly marketing agreements, voluntary restraint agreements, or other devices that set quantitative targets to divide up markets are dangerous, ineffective, and often enormously costly to consumers. Rather than promoting innovation in a nation’s industries, managed trade guarantees a market for inefficient companies.” (Emphasis added)

Should companies be protected against unfair trade practices?

Absolutely.

But should there be some sort of artificial barrier be constructed to protect companies that aren’t competitive?

That answers itself.

Porter wrote:

“Companies achieve competitive advantage through acts of innovation.”

Companies that are protected really don’t have a need to innovate.

And he wrote this:

“Competitors will eventually and inevitably overtake any company that stops improving and innovating.”

Plenty has changed since 1990. But what it takes to be competitive hasn’t, which is relentless effort. While the protection of government-imposed trade barriers may help in the short run, in the long run companies that aren’t competing on a global level will find themselves technologically irrelevant.

Which brings me back to the USMCA.

The 23^rd annual AlixPartners Global Automotive Outlook was recently released. It contains an abundance of data that is likely to have—or ought to have—plenty of domestic OEM and supplier executives reaching for their Mylanta, particularly given some of the numbers associated with the burgeoning and seemingly Borg-like Chinese auto industry.

Numbers like Chinese automakers exporting 10 million units in 2026 as the Chinese OEMs look for places they can sell and achieve higher profitability; Chinese automakers having 12% of the European market this year and 16% by 2030; Chinese companies refreshing their showrooms at a much faster pace than OEMs in the rest of the world (i.e., as regards percent of models launched between 2023 and 2025, Geely was the lowest at 52% and for non-Chinese OEMs, VW was the highest at 34%); Chinese vehicles having a significant advantage in terms of vehicles deploying ADAS (about 60% vs. a little better than 40% in the US and Europe).

And because vehicle manufacturers depend as much on future buyers as they do on those in showrooms today, AlixPartners surveyed people between 18 and 34 years old and asked them what countries they are avoiding when it comes to buying products. Of those in the US, only 24% said they are avoiding products from China.

If US OEMs are to compete with Chinese OEMs, then it is unlikely this can happen solely within the borders of the country.

While Porter wrote “Competitive advantage is created and sustained through a highly localized process. . . .”the localization in the 21^st century consists of things like trade blocs. The US has a natural geographical one with Canada and Mexico and that should be taken advantage of, not something we should be obstreperous about.

Mark Wakefield, AlixPartners global automotive market lead, suggests there be the creation of “Fortress North America,” which has as its objective using the competitive advantages of the three countries—raw materials and processing from Canada; labor-intensive subassembly in Mexico; technology and high-value manufacturing in the US—creating an integrated supply chain that is meshed to compete with China.

This isn’t a fortress in the context of being like a castle with a moat surrounding it, but one that creates a position of strength from which power can be projected by developing and manufacturing world-class products.

Wakefield noted:

“The USMCA renegotiation may lead to added cost to U.S. vehicles, with a larger piece of a smaller pie for the U.S., or an opportunity to create a ‘Fortress North America,’ with the U.S. at the center of a resilient and competitive industry with a supply chain leveraging the strengths and installed capacity in Mexico and Canada, and pre-competitive cooperation in the U.S. on the key areas such as battery supply chains, semiconductors, autonomy, and electrical architectures.”

Or we can just pretend that we have everything that we need.

This may work for a while. But not a long while.

Porter:

“Competitors will eventually and inevitably overtake any company that stops improving and innovating.”

Protected companies have little incentive to improve and innovate. And while they may think they are, those companies that don’t have high levels of protection are truly going to do what it takes to survive and possibly prosper.