Along with the new Ford F-150 and Nissan’s new “futuristic” design, the big news surrounding the Detroit Auto Show was the fallout from the Twitter war started a week ago by President-elect Trump against the many of the large automakers.
Trump claimed his first victory in this conflagration when Ford announced that it would create 700 new jobs in the United States and cancel construction on a new $1.6 billion manufacturing facility in Mexico. However, this “victory” appears to be rather shallow.
As NBC and Automotive News report, Ford’s recent decision has far less to do with the President-elect than it does with business trends and cost-benefits analyses. In particular, the news reflects 1) a fall in demand for small vehicles and 2) an underutilization of existing manufacturing plants.
In an earlier post, I examined the booming Mexican automobile manufacturing sector. The boom has been driven by foreign companies relocating their small vehicle production to Mexico while continuing to manufacture SUVs, crossovers, and trucks at home. However, low gas prices and shifting consumer preference are forcing companies to reexamine which and how many vehicles they manufacture, as seen below in the charts from the
While oil prices were high, car companies were investing heavily into smaller vehicle production, particularly in Mexico, to meet consumer demand. However, low gas prices and shifting consumer preference back to larger vehicles are forcing companies to reexamine which and how many vehicles they manufacture, as seen below in the charts from the Wall Street Journal.
Ford’s decision to cancel the new facility in favor of ramping up production at its Hermosillo plant is a reflection of this new economic reality. Low gas prices and increasing economic growth are pushing consumers away from smaller, more efficient cars to larger SUVs and trucks. Ford does not need the increased manufacturing capacity that a new plant would bring. Instead, it can ramp up existing plants to meet demand for cars in the short-term.
The free trade agreements that Trump railed against during the US presidential campaign and after the election are a significant factor pushing most of the world’s largest vehicle manufacturers to build facilities in Mexico.
As I’ve argued before, Mexico’s many free and preferential trade agreements, skilled workers, low wages, proximity to the United States, and access to both the Atlantic and Pacific Oceans make the country a prime location for manufacturers looking to export to around the globe, especially vehicle manufacturers.
Although President-elect Trump lambasts car companies for assembling vehicles in Mexico, the billions of dollars invested in large factories, high-skilled labor force, and the North American Free Trade Agreement will ensure that Mexico remains the hub for vehicle exports well into the future.
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