Let’s talk about Ford Motor Company’s decision to change its plans for a new production plant in Mexico and create new jobs in Michigan. Keeping in mind that Ford makes more cars and trucks in the United States than any other automaker, we’d like to do is take popular opinion out of the conversation and get down to the economics of the situation. We’re pointing out that age-old issue with picking up one end of a stick—you can’t avoid picking up the other end of the stick with it. In this case we’ll call that economic consequence.
The Story
On January 3, 2017, Ford Motor Co. announced that it has scrapped plans to build a new $1.6 billion assembly plant in Mexico. It seemed this announcement was in direct response to then President-elect Trump’s threat to impose tariffs on cars assembled in Mexico.
Though the shadow of President Trump seemed to loom over Ford’s decision, Mark Fields, the C.E.O. of Ford, said market demand – not criticism from Donald Trump – was the main reason for canceling plans to build a Mexican plant (Via CNBC). Ford claims its decision is based on the forecast that demand for the Ford Focus will drop as U.S. motorists shift to SUVs, crossovers, and light trucks.
“We reached the point where we believed we could get . . . capital savings by abandoning the new plant” Joe Hinrichs, Ford’s President of the Americas, told NBCNews.
Small car production, such as the compact Focus model, will still move to Mexico, just into an existing Ford plant in Hermosillo. Meanwhile, some of the savings on the abandoned Mexican plant will help Ford make a business case for adding two new electrified models that will be produced in the Michigan factory.
As we explore this topic, we can’t ignore the nature of any company. If a company is not profitable it’s out of business. If you’re not growing or you start losing money, people are going to sell your stock—it’s that simple. So when you move jobs from Mexico to the U.S. it’s not just about people getting jobs here. It can potentially cause production and labor costs to increase. If it costs a manufacturer more money to make a car, where does that money come from? Here’s a hint: the car manufacture will not take the hit. It’s you as either a taxpayer or a consumer. Again, when you pick up one end of the stick, the other end comes up with it.
Don’t misunderstand—we totally agree that jobs in the U.S. are a good thing, and we absolutely agree that people need a living wage, but there’s give and take in the economy. If you’re in California where the minimum wage has risen to $10.50, you’re either going to be paying more for a Big Mac or ordering it from a robot. It’s just the facts. We’re not saying that’s bad, it’s just the facts.
Ford currently has about 8,800 workers in Mexico and employees 85,000 in the United States, and virtually every major automaker now assembles vehicles in Mexico. In the past year alone, new factories have been opened or started by players including Nissan’s Infiniti that is pairing up on a plant with Mercedes-Benz, Kia, and Audi—all due to decreased manufacturing costs; decisions that make sense for the stockholders and keep costs down for the consumer.
Trump’s Role
Though Trump dished out threats to slap a 35% tax on cars, trucks, and parts imported from Mexico, he also made it very clear there will be tax reform and that could be beneficial to the auto industry and the infrastructure of their investments. Tax reform is a critical part of Ford’s commitment, and the company is counting on the administration to bring down the corporate tax rates—they’re giving him the benefit of a doubt.
Ford spokeswoman, Christin Baker, said “We are encouraged the economic policies he will pursue will help improve U.S. competitiveness and make it possible to keep production of this vehicle here in the U.S.” and Ford’s chief financial officer, Robert L. Shanks expressed hope that Trump’s policies would “provide an environment where it makes economic sense to build back up manufacturing jobs here.”
Creating jobs is a good story, and Ford’s placing a bet that corporate taxes will go down. The topic brings up a pivotal point in our economy where volatility has become the norm. To hear more about this topic from Paradigm Life, click on our podcast episode, It was the Best of Times. It was the Worst of Times, where Patrick Donohoe talks with co-host Chunga about Ford Motor Company’s decision.
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