Joelle Gamble Copeland most recently served as Deputy Director at the White House National Economic Council. Prior to that, she was Chief Economist for the Department of Labor. The views represented here are solely of the author and do not represent the views of her past or future employers.
Introduction
If I were to ask you to name the first image that comes to mind when you hear “American auto industry,” what do you think of? Probably an assembly line in Michigan or Ohio or a dealership lot stacked with large trucks. You would not be wrong. Those images do reflect the reality of one of America’s most economically important industries (Note 1). But they are not the full picture. By number of firms and employment, most of auto manufacturing is in parts manufacturing (Note 2). These small and medium-sized companies make components for large automakers—from metal stamping to axles and engine parts to software–in nearly every state in the union. With unevenness in product demand from the clean energy transition and fierce international competition, the U.S. domestic auto supply chain faces serious headwinds.
This brief proposes a role for the public sector in sustaining the auto supply chain and offers policy recommendations that a future Administration and Congress can implement to strengthen auto supply chain companies, boost quality employment and foster American competitiveness in the race to win the global auto market.
Why invest in the auto supply chain?
A modern auto supply chain, with the capacity to retain workers and supply
the clean energy sector, is critical to the auto industry’s ability to make quality,
affordable vehicles to compete globally. Investing in suppliers will increase U.S.
productive capacity, support local employment and help communities capture
the positive economic spillovers that come from making products in America.
Sustaining suppliers is integral to building an enduring U.S. manufacturing base
that can meet America’s economic and national security objectives.
Much of the public conversation on supply chains has focused on their sprawling,
global nature. For the auto industry, North America, and the U.S. in particular,
houses a significant share of its supply chain (Note 3). Parts manufacturing–excluding vehicle bodies and trailers–was over half of auto manufacturing employment in 2023 (573,000 jobs) (Note 4). And there are thousands of auto suppliers across the United States (Note 5). This is likely an underestimate as manufacturers in other industries–like metals and electronics–also supply the auto industry. This brief focuses primarily on parts suppliers to automakers. However, there are also companies that supply service parts that help maintain the hundreds of millions of vehicles on U.S. roads.
SOURCE: Auto supplier corporate and manufacturing sites by employee count. Data courtesy of Elm Analytics, LLC. From the Numerus™ Online Automotive Database
The close proximity of suppliers to automakers matters from a supply chain risk management standpoint as companies increasingly shift to near- or onshore production to avoid the costly disruptions that often come from environmental and geopolitical exogenous shocks to global transportation routes. Manufacturing processes are also a source of knowhow and innovation. As the U.S. seeks to build more advanced manufacturing and technology clusters, there is opportunity for innovation spillovers to move along supply chains (Note 6). Many auto suppliers are also anchor employers in their communities, which are urban, suburban and rural.
A potent combination of macroeconomic headwinds (i.e. high capital costs),
uncertainty of demand for clean vehicles, and often-subsidized international
competition to supply automakers complicate the future of domestic auto
suppliers. The clean vehicle transition requires internal combustion engine (ICE)-
only parts suppliers to retool if they intend to supply clean vehicle parts or other
industries in the long-run. Yet, in the short-run there is minimal clarity on the
length of the ramp-down in demand for ICE-parts. Retooling is costly and running
product lines for both ICE and clean vehicles is not always profitable. Clean
vehicle-only suppliers are also racing down the cost curve for battery production
in order to secure customers, shore up project-financing (which requires a
customer base) and compete with international companies, including those in
the People’s Republic of China. On top of these dynamics, smaller suppliers have
difficulty accessing capital as they are often lower margin and revenue from
clean vehicle capital projects is tied to certainty in clean parts demand (Note 7). Even top auto suppliers, which are large businesses like Bosch, Magna and Lear had lower margins than the automakers coming out of the pandemic as they were squeezed by rising input costs (Note 8).
There is an opportunity to help the auto supplier base navigate economic
headwinds and the clean energy transition. Investing in retooling and facility
upgrades can boost company competitiveness, cybersecurity and improve worker
safety. Trade policy that advantages high-road practices and lowers barriers to
accessing export markets for suppliers can complement other competitiveness
policies. Finally, support for common sense approaches to boosting labor supply–including investing in communities with an existing pool of autoworkers–can
boost companies’ productive capacity. The public sector plays a role in facilitating
these actions.
What is the Role of the Public Sector?
During the pandemic and subsequent geopolitical shocks (like conflicts in Ukraine
and the Middle East), snarled supply chains sent goods inflation skyrocketing
and made it harder for Americans to access daily needs like food and medication.
Many Americans learned how important the ability to move goods and parts
around the world was to their daily lives and for the ability of American
companies to make the products they use daily–like cars and trucks. In response
these acute disruptions to supply chains, the federal government, in coordination
with private companies, state and local leaders and non-profits, took a more
active approach to implementing policies that improve supply chain resiliency or
solve acute disruptions and bottlenecks (Note 9).
Private companies manage supply chains. Competitive markets incentivize companies to maximize efficiency and productivity in a manner that raises their bottom line. However, these market pressures do not incentivize the substantial capital investments to upgrade and maintain the infrastructure necessary for a resilient supply chain across an industry. The federal government, alongside states and localities, can and should play a role in derisking these critical investments to facilitate the movement of goods.
Federal investment can also help derisk investments and crowd in additional
private capital to build supply chain resilience across an industry. This is
particularly important as suppliers bridge the valley of death many startups face, (Note 10) including domestic critical mineral extraction and processing projects. Federal financial assistance programs can also help suppliers who need to upgrade
their facilities or retool to supply companies, whether inside or outside of the
automotive industry. Federal programs should consider being agnostic as to
which industry suppliers support after retooling, as there may not be equivalent
demand for clean vehicle auto parts as for ICE vehicle parts, given that clean
vehicles have fewer components (Note 11). Note that fewer component parts in clean vehicles may not necessarily mean fewer labor hours (Note 12).
The federal government can also partner to build local infrastructure for small manufacturers to provide capital access and support for current and future
autoworkers. By working with trusted intermediaries and locally-led coalitions
of companies, labor, schools and non-profits, federal programs are more likely to
reach their intended audiences. The current Administration has already creatively
used its existing authorities to provide support along these lines for companies
and workers in the auto supply chain, including but not limited to:
- Providing grants to states to distribute to auto suppliers who want to retool their facilities, including a recent $22 million award to a partnership in the State of Michigan (Note 13).
- Licensing a Small Business Investment Company to raise and invest
government-backed funds into small auto suppliers. Monroe Capital recently
announced a goal to raise a $1 billion fund to support small- and medium-sized
suppliers (Note 14). - Supporting manufacturers to train current and future workers on a curriculum specific to the needs of the battery supply chain through the Battery Workforce Initiative pilot (Note 15).
The federal government has recognized the strategic importance of policy to
proactively help the auto supplier base modernize to meet demand for the cars
of the future. However, they are constrained by existing appropriations and
Congressional authorities. A new Congress and Administration can build a more
flexible toolkit to sustain the auto supply chain.
Policy Suggestions
Candidates from both major parties have argued that investments in America’s
manufacturing base are important for boosting U.S. global competitiveness,
enhancing national security and sustaining quality employment. There is an
opening for a new Administration and a new session of Congress to build on
the progress made towards these goals over the last four years, using targeted
policies to boost one of the largest segments of American manufacturing capacity: small- and medium-sized auto suppliers. Unlike large, capital-intensive projects
(i.e. semiconductor fabs), retooling existing suppliers and boosting new battery
supply chain start-ups is a relatively low-cost endeavor that, with private capital,
can scale. A public investment strategy, coupled with a smart trade strategy
and policies that help America’s autoworkers, can help preserve and grow the
capacity of the U.S. auto industry.
I. Policies to modernize and grow manufacturing facilities
Federal capital programs, especially when compounded by state and local funding, can provide small- and medium-sized suppliers with access to affordable
capital with which to modernize facilities and retool production lines for clean
vehicle or other industry customers. They can also help companies building new
products bridge the valley of death. These recommendations build on existing
federal programs or bipartisan Congressional proposals. Across these proposals,
building in explicit coordination with ARPA-E funding challenges and other
programs can help companies not just catch up to today’s market but also leap
ahead (Note 16).
- Broaden the flexibility of Department of Energy Manufacturing
Conversion Grants: The Department of Energy awarded nearly $2 billion in
cost-share grants to large automakers and set aside $50 million for states to
regrant funds to small- and medium-sized auto suppliers to retool to meet
clean vehicle demand. Congress should appropriate additional funds for this
program with changes to streamline access for small manufacturers and allow
for their retooling to supply other industries, including by:- Increasing the amount of grant dollars available only for small
suppliers with a streamlined set of requirements for direct applications
to the Department of Energy and regrants through states and third-party
intermediaries; - Allowing auto supplier recipients to use federal funds to retool
production lines to supply other manufacturing industries (i.e. clean energy
and aerospace); - Codifying the Department’s approach of supporting auto workers by prioritizing projects that retain workers and have public statements of union neutrality; and
- Encouraging investments in communities with an existing supply
of manufacturing workers by prioritizing retooling proposals at the same
worksite or in the same commuting zone.
- Increasing the amount of grant dollars available only for small
- Allow the Department of Energy’s Manufacturing Office to explicitly
support qualified suppliers through the valley of death: The Department of Energy’s Manufacturing and Supply Chain Office (MESC)’ Battery Materials Processing and Battery Manufacturing and Recycling Programs are two oversubscribed grant programs supporting the construction and expansion of facilities to extract critical minerals for batteries (i.e. Albermarle U.S.), battery component manufacturing and the demonstration of products using new or recycled materials (i.e. Form Energy) . Some of these facilities are facing a valley of death, where they are at risk of running out of cash while they are securing a customer base needed to bring in more revenue and unlock project financing. Congress should appropriate additional funds for these two popular programs, including funding specifically for current beneficiaries attempting to bridge the valley of death. An additional approach Congress could take would be to authorize the MESC office to use grant funds to partner with an intermediary to build more liquid markets for upstream materials including through creative financing mechanisms such as options, forward contracts, or cost-of-differences contracts. This, in addition to the offtake agreements undertaken by Original Equipment Manufacturers (OEMs) and other customers, would help combat artificially low PRC materials prices which are delaying or suspending domestic operations. - Restore full expensing of equipment for small manufacturers: In the
upcoming fight over the expiration of provisions in the Tax Cuts and Jobs
Act, Congress should restore the 100 percent deduction for machinery and
equipment for small and medium-sized manufacturing companies, specifically.
And eligibility could be limited to manufacturers purchasing equipment to
supply strategic industries, including clean energy, semiconductors, and
aerospace. Full expensing began to phase out in 2023 and will fully expire in
2027. This will take pressure off companies who want to retool but are still
deducting expenses for existing equipment.
Target existing credit programs to small manufacturers: Additionally,
it is very difficult for small companies to access subsidized credit programs
that are run nationally. There are opportunities for the Small Business
Administration (SBA) and State Small Business Credit Initiative leaders–
in states–to help break down barriers for small auto suppliers to access
government-backed loans from SBA-approved lenders and both debt
and equity from SSBCI-affiliated financial institutions. For example, SBA
could work with the Department of Commerce’s Manufacturing Extension
Partnership and states with a large concentration of suppliers to identify
and onboard financial institutions who work with the supplier base into the
lending programs.
II. Policies to grow the auto workforce
Workforce training programs and partnerships must build a pipeline of future
auto workers while remaining accessible to the current workforce. This will
help build training programs that meet future labor demand in a sector that is
grappling with technological changes and a need for workers who can adapt
to new processes and machines. That’s why this brief focuses heavily on high
schools. At the same time, small- and medium-size companies may not always
have the bandwidth or resources to build individualized workforce partnerships.
A consortia model allows multiple companies to participate in the same local program without having to set it up themselves.
- Invest in auto worker training consortia through local high schools:
To develop a sustainable local talent base for the sector, Congress should
appropriate funds to the Department of Labor’s Employment Training
Administration and Department of Education to jointly administer a
grant program to states to fund high-school based training consortia that
create clear pathways from high school to auto manufacturing jobs with
regional companies through Career and Technical Education programs and
apprenticeships. Recipient high schools should be required to partner with
local auto suppliers, union locals and community colleges to ensure that
the training partnership can serve a diverse pipeline of students, including
high school and community college students and existing auto workers
who want to train new skills. Potential examples of this approach are the
various partnerships between the Detroit Lions, the Pistons, Detroit Public
Schools and local manufacturers on programs for high school students from
underrepresented and employment-distressed neighborhoods (Note 17). - Promote labor management partnerships for financial assistance recipients: Federal financial assistance programs should require or prioritize companies with established labor management partnerships or a written commitment to form one. This is particularly important as companies navigate the clean vehicle transition and modernize their facilities. Shifts in the type of labor demanded can be better met if organizations representing workers, including unions, have an existing partnership with employers. The UAW and IBEW have already set up exemplar multi-employer partnerships (Notes 18 and 19). Example legislative text can be found here (Note 20).
- Develop a manufacturing prevailing wage: Quality wages are important
to a worker recruitment strategy. Davis-Bacon Act prevailing wages are
prevalent in the construction industry, supporting good jobs on infrastructure,
commercial and residential projects while attracting workers. There is not
a clear equivalent for the manufacturing sector and developing one would
require careful consideration of the compensation and structural differences
between the two sectors. Congress should appropriate funds to the Bureau
of Labor Statistics to field surveys and use administrative data from the
unemployment insurance accounting system develop, publish and update
a manufacturing prevailing wage database that can be used by companies
(particularly new battery supply chain companies) and policymakers alike.
Prioritizing retooling of existing facilities and greenfield investments in
communities with a history of auto manufacturing is a smart approach to solving
manufacturers’ labor supply concerns. Places with a pool of workers who understand the industry and have experience in manufacturing will cut down
on search and training costs for companies and create economic security for
workers. To recruit and retain qualified workers in today’s relatively tight labor
market, companies must offer good wages and benefits.
- Incentivize investment in “auto communities” through retooling and facility modernization grant programs: Similar to the “energy communities” framework used to encourage investment in fossil fuel communities (note 21), the Modern Steel Act (Khanna-CA) uses a “legacy communities” definition to prioritize investments in communities who traditionally produce iron and steel (Note 22). Steel is an important part of the auto supply chain–selling to both component makers and the automakers themselves. So, this framework could be broadened to include auto parts, vehicle assembly and bodies and trailers assembly to prioritize providing grants to projects in places with an existing, trained workforce. Preliminary analysis from the U.S. Treasury suggests the “energy communities” prioritization has led to significant boost in investment in these places (Note 23).
- Add an “auto communities” bonus definition to clean vehicle tax credits: Congress could add a “bonus” tax credit for the Advanced Manufacturing Production Credit, by increasing the share of the cost manufacturers can claim for domestic battery component production and module assembly if production takes place in an “auto community.”
III. Policies to level the playing field for American industry
Finally, it is important that help small- and medium-sized suppliers access other
markets to grow and diversify their business. This could either be through direct
sales or by selling downstream to customers with an export business. The Export-
Import Bank (EXIM) reauthorization process provides an opportunity to achieve
this goal.
Companies will not be able to compete without a level playing field. So, additional
trade mechanisms that prioritize high-road practices are needed, including a
cross-border adjustment mechanism and strengthening the U.S.-Mexico-Canada
Agreement in 2026.
- Reform EXIM processes to better support small and medium-sized
companies: EXIM is up for reauthorization in 2026, which presents an
opportunity to help the bank better serve its mission of supporting the export
of U.S. products and American jobs. The current Administration created a
Made-More-in-America initiative which made progress toward supporting
small and medium-sized projects by instituting a lower, 15 percent export
nexus for them. Congress should further lower barriers for small companies by increasing the default rate cap from 2 percent to 4-5 percent or eliminating it all together, allowing EXIM to take on riskier investments (Note 24). Congress could also appropriate a small sum to EXIM to help the bank cover the relatively higher transaction costs of lending to smaller companies. Congress should also codify the Made-More-in-America initiative by including it in the bank’s charter. - Implement a Carbon-Border Adjustment Mechanism (CBAM) for select industrial imports, including iron, steel and aluminum: CBAMs can put a price of carbon leakage during the production of imported products and charge a comparable import fee. The European Union adopted a CBAM on select imports in October 2023. U.S. goods are less carbon-intensive than the global average. So, this approach, depending on the design, advantages the domestic supply chain (Note 25). There are several bipartisan proposals for a CBAM. The Joint Economic Committee has a helpful comparison chart (Note 26). Any CBAM proposal must come with resources for the Department of Homeland Security, the Environmental Protection Agency and the National Laboratories to calculate and enforce the import fee.
- Support domestic suppliers and workers in the upcoming USMCA
review: The U.S.-Canada-Mexico Agreement has a review clause that requires
all three countries to confirm whether to continue the agreement by July 1,
2026. This clause was meant to give the U.S. leverage to propose changes to
the agreement. Given developments in the auto market since the agreement
was made, the U.S. should propose several changes:- The rules of origin requirements could be ported over to electric
vehicles, not just ICE vehicles. However, if this is done, there will need to be
a reconsideration of requirements in comparison to the Inflation Reduction
Act’s 30D tax credit. If not, companies could meet the USMCA threshold
while not meeting the requirements for the tax credit. - USMCA should also address the treatment of State-owned enterprises
and facilities owned or controlled by foreign entities of concern (Note 27). - The Labor Value Content mechanism needs to change. Initial evidence
suggests that the Labor Value Content portion of the rules of origin has not
served its intended purpose of raising Mexican worker wages (Note 28). - The federal government should create a review taskforce jointly at
the Department of Labor and Department of Homeland Security focused
on generating Labor Value Content reform proposals, reviewing changes to
align domestic U.S. policy and the rules of origins, and other policy options
related to the effectiveness of these rules (i.e. tariffs), in advance of the
review deadline. The taskforce should bring together labor, economists from auto companies (of all sizes), and experts from non-profits or
universities.
- The rules of origin requirements could be ported over to electric
Conclusion
A future Administration and new Congress can make creative and decisive
policy to support the American auto manufacturing base. Through legislation
and administrative actions, they should design flexible and effective solutions to
modernize the American auto supply chain and support America’s auto workers –
who are the backbone of the industry.
Thank you to the experts who provided feedback and guidance on this report,
including Sue Helper, Dave Andrea, Jonathan Smith, Raj Nayak, Brent Parton,
Pronita Gupta, and many others. Special thanks to the Elm Analytics team for
sharing their valuable data. This report is only a reflection of the author’s views.
Endnotes
1 - The auto industry is typically 2-3 percent of annual U.S. GDP and over 3 million
jobs. U.S. Bureau of Economic Analysis, “Value added by Industry as a Percentage of Gross Domestic Product” (accessed Friday, October 18, 2024).
2 - This statement just refers to the manufacturing sector. There is significant autorelated employment in the retail and services sectors.
3 - North America’s rapidly growing electric Vehicle Market: Implications for the
Geography of Automotive Production - Federal Reserve Bank of Chicago. (2022).
https://www.chicagofed.org/publications/economic-perspectives/2022/5.
4 - Automotive Industry: Employment, Earnings, and hours: U.S. Bureau of Labor
Statistics. (2022, October 5). Bureau of Labor Statistics. https://www.bls.gov/iag/tgs/iagauto.htm.
5 - Hough, T. (2019, November 15). Ever wonder how many US auto suppliers
there really are? https://www.linkedin.com/pulse/ever-wonder-how-many-us-autosuppliers-really-tor-hough.
6 - Chen, S., & Liu, X. (2022). Innovation spillovers in production networks: Evidence from the establishment of national high-tech zones. China Economic Quarterly International, 2(1), 42–54. https://doi.org/10.1016/j.ceqi.2022.03.001.
7 - Automotive Supplier Study. (2023). Deloitte United States. https://www2.deloitte.com/us/en/pages/manufacturing/articles/global-automotive-supplier-study.html.
8 - This statement just refers to the manufacturing sector. There is significant autorelated employment in the retail and services sectors.
9 - FLOW. (2024). US Department of Transportation. https://www.transportation.gov/freight-infrastructure-and-policy/flow.
10 - The valley of death is the gap between having a produce and generating enough revenue to cover business costs. Companies, mainly start-ups, often go out of business during this period as they run out of cash.
11 - Idaho National Laboratory. How do gasoline & electric vehicles compare? In
CALSTART. https://avt.inl.gov/sites/default/files/pdf/fsev/compare.pdf
12 - Cotterman, T., Fuchs, E. R., & Whitefoot, K. (2022). The Transition to electrified Vehicles: Evaluating the labor demand of manufacturing conventional versus battery electric vehicle powertrains. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4128130.
13 - DOE Awards 18M to MI to help small suppliers modernize their manufacturing capabilities. (2024, August 15). https://www.michigan.gov/leo/news/2024/08/15/doe-awards-18m-to-mi-to-help-small-suppliers-modernize-their-manufacturing-capabilities.
14 - Lowery, L. (2024, October 1). MEMA, Auto Innovators to help facilitate $1B
fund for automotive industry. Repairer Driven News. https://www.repairerdrivennews.com/2024/10/02/mema-auto-innovators-to-help-facilitate-1b-fund-for-automotiveindustry/.
15 - Battery Workforce Initiative. netl.doe.gov. https://netl.doe.gov/bwi
16 - Home | arpa-e.energy.gov. (2024, October 16). https://arpa-e.energy.gov/
17 - Detroit Public Schools Community District, Stellantis and City of Detroit (Detroit at Work) partners to leverage $4 million investment to support students through Advanced Manufacturing Academy. (n.d.) https://www.detroitk12.org/site/default.aspx?PageType=3&ModuleInstanceID=22371&ViewID=7b97f7ed-8e5e-4120-848f-a8b4987d588f&RenderLoc=0&FlexDataID=53002&PageID=4920&Comments=true.
18 - About - The UAW Center for Manufacturing a Green Economy (UAW-CMGE).
(2024, October 16). The UAW Center for Manufacturing a Green Economy (UAWCMGE). https://uawcmge.org/about/.
19 - IBEW. (2024, August 6). IBEW Local Unions announce new Apprenticeship
Initiative for battery and advanced manufacturing sectors. https://csaew.com/ibew-local-unions-announce-new-apprenticeship.
20 - Text - H.R.9334 - 118th Congress (2023-2024): Steel Modernization Act of
2024. (n.d.). Congress.gov | Library of Congress. https://www.congress.gov/bill/118thcongress/house-bill/9334/text.
21 - Energy Communities Data page. (2024, September 20). U.S. Department of The Treasury. https://home.treasury.gov/news/featured-stories/the-inflation-reduction-act-a-place-based-analysis-updates-from-q3-and-q4-2023.
22 - Text - H.R.9334 - 118th Congress (2023-2024): Steel Modernization Act of
2024. (n.d.). Congress.gov | Library of Congress. https://www.congress.gov/bill/118thcongress/house-bill/9334/text.
23 - The Inflation Reduction Act: A Place-Based Analysis, Updates from Q3 and Q4 2023. (2024, September 20). U.S. Department of The Treasury. https://home.treasury.gov/news/featured-stories/the-inflation-reduction-act-a-place-based-analysisupdates-from-q3-and-q4-2023.
24 - EXPORT-IMPORT BANK OF THE UNITED STATES. (2023). FISCAL YEAR 2023 (Q2) DEFAULT EXPERIENCE. In EXPORT-IMPORT BANK OF THE UNITED STATES DEFAULT RATE REPORT. https://img.exim.gov/s3fs-public/congressional-resources/default-report/default-report—march-2023_final-with-stress-test-addendum_508-compliant.pdf.
25 - Rorke, C., Bertelsen, G., & Climate Leadership Council. (2020). AMERICA’S
CARBON ADVANTAGE. https://clcouncil.org/reports/americas-carbon-advantage.pdf.
26 - United States Joint Economic Committee. (2024, February 8). What is a carbonborder adjustment mechanism (CBAM) and what are some legislative proposals to make one? - United States Joint Economic Committee. https://www.jec.senate.gov/public/index.cfm/democrats/2024/2/what-is-a-carbon-border-adjustmentmechanism-cbam-and-what-are-some-legislative-proposals-to-make-one.
27 - Interpretation of foreign entity of concern. (2024, May 6). Federal Register. https://www.federalregister.gov/documents/2024/05/06/2024-08913/interpretation-of-foreign-entity-of-concern.
28 - Fortune-Taylor, S., Hallren, R. J., & U.S. International Trade Commission. (2022). Worker-level responses to the USMCA High Wage Labor Value Content Rules requirement. In ECONOMICS WORKING PAPER SERIES (Working Paper 2022–01–A). U.S. International Trade Commission. https://www.usitc.gov/publications/332/working_papers/worker_level_responses_fortune_taylor_and_hallren_1.7.12.pdf.
