Ford has to Plan Production Around a Loose Cannon

Last year during the first few months of Donald Trump’s Presidency, Ford made an announcement to invest heavily in manufacturing plants in Michigan. In Trump’s typical mode of operation, he applauded the plan as something that had happened under his watch. The President even tweeted: “Major investment to be made in three Michigan plants. Car companies coming back to U.S. JOBS! JOBS! JOBS!”

Unfortunately there were a couple of issues that were overlooked (or not mentioned). Firstly, the announcement was part of a plan with the Union of Auto Workers that dated back to 2015 to upgrade and invest in these plants to build the Ford Bronco and Ranger trucks with added investment in an engine factory to support the assembly plant. These kinds of decisions can never be made within a few weeks of a Presidency starting and many people took Trump’s tweets with a pinch of salt.

Some of the investment (about $30M) that Ford was making came from the Michigan Economic Development Corporation (MEDC) and was a plan to stop jobs going south to Mexico. This was clearly something Trump was desperate to do as well, as he intended to cancel the North America Free Trade Agreement with Mexico and Canada. MEDC is a public/private partnership so some of those funds came from taxpayers – a circular flow of cash in my opinion!

The assembly plant in Michigan was making the Focus sedan for the US market and this model was shunted in favour of the bigger, more profitable SUVs. The plan was to shift the production of the Focus to Mexico. So, rather than increase the overall capacity in Michigan, the company decided to use the announcement as a “feel good” story. Those outside the industry weren’t told about the jobs being created (or saved) in Mexico until later.

Then the President stepped in and made things a little difficult by demanding that the Free Trade Agreement be ripped up and any imports from south of the border would be subjected to new tariffs. The messaging was strong: it’s jobs for the US and not Canada or Mexico. To counter this it seems, Ford announced in June that the Mexico plan was dead – the Focus would move assembly to China instead. They already build a version for the China market, so increasing production would be easier, even with a different trim level. Ford had said that moving the Focus to Mexico would have saved them $500M in costs, then they added another $500M cost saving by transferring the production to China.

That’s $1B of savings compared to building the cars in the US – so much for adding in lots of jobs to the US market and estimates were that only a mere 130 jobs were created to build the SUVs in Michigan. One of the reasons cited for the move to China was that the sales of the Focus had dropped by nearly 20% in the home market and that they didn’t have to retool two plants, just the one in China. Interestingly, Ford also said that the savings made would outweigh the increased landed cost of the cars – it is cheaper to build and ship cars from Mexico than China even with the President threatening a border tax on all vehicles from Mexico.

All was going OK until the President surprised the world earlier this year with his tariffs on steel and aluminium – unsubtly directed at China. Now Ford could be in a pickle because Trump and China are heading into a trade war with the auto manufacturers smack in the middle. Ford are certainly ramping up production and agreements in China to build more cars including electric ones, however I suspect that they will stay in China and not be exported over the Pacific. It will also be interesting to see if the Focus is dropped from the US range if sales keep dropping.

If the trade war with China does escalate, Ford have plenty of other “friendly” factories that also build the Focus: Germany, Taiwan and Argentina for example, assuming that sales in the US are big enough to warrant the imports.