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Keeping Auto Manufacturing in the US

11/21/2016
By Charles Payne, CEO & Principal Analyst

"I worked hard with Bill Ford to keep the Lincoln plant in Kentucky. I owed it to the great State of Kentucky for their confidence in me!"

"He will be keeping the Lincoln plant in Kentucky - no Mexico"

-Donald Trump Tweets

The news that Ford Motor isn’t moving production at the Louisville Lincoln plant to Mexico is being greeted as a political coup for President-elect Donald Trump, but it’s a small battle in a larger war.

Ford faces a dilemma of having to compete against rivals that are populating Mexico with plants to take advantage of not only cheaper labor cost, but Mexico’s (40) free-trade agreements that allow duty-free access to the largest export markets in the world.  (Europe has a 10% duty on U.S. car imports and 22% for trucks, including pickups.)

Even before Thursday night’s tweet, Ford had pledged not to close any U.S. plants through 2019 when its contract with United Auto Workers expires. Moreover, Mark Fields, CEO of Ford, just reiterated on Tuesday that the company will move small car production to Mexico. He also pleaded that the current Michigan factories will stay open and will focus on different products.

The dilemma is centered on small cars where profit margins are thin as demand continues to dwindle.  It’s somewhat ironic that Donald Trump’s energy plan may cap the price of crude, keeping the pressure on small car sales while pickup trucks and SUVs bring in the big bucks and the profits. But not all versions of SUVs fly out dealer lots and that’s the problem with the Louisville Kentucky plant in question.

The plant makes the Lincoln MKC SUV; Ford has only sold 20,000 this year, versus 258,000 Escapes that were snapped up by customers.

The whole American Car issue has become even murkier because so many foreign automakers have operations in the United States.  According to Cars.com, there are only eight ‘American Made’ cars with at least 75% of parts made domestically – only three names are from the so-called Detroit’s Big Three:

1. Toyota Camry

2.  Honda Accord

3. Toyota Sienna

4. Honda Odyssey

5. Honda Pilot

6. Chevrolet Traverse

7. GMC Acadia

8. Buick Enclave

I am not sure how this will all play out because there are several issues and components to a partial solution. 

Automobiles can never be made cheaper in America than in Mexico, but the fact of the matter is that Canada is the number one importer of cars and light trucks into America (Mexico and Japan are two and three). This is about more than just labor.

I suspect lower taxes, fewer regulations, and other economic incentives will help immensely – I don’t think a tariff on individual companies is the answer. Ford enjoyed a major advantage over rivals for not accepting bailout funds, so Ford understands the power of looking patriotic. 

One thing we must understand is that we are the greatest nation with the most robust economy (even with the flaccid recovery) in the world.  There are options and by the same token, we want to profit off a growing middle-class around the planet as well. 

On that note, I suspect the tide of jobs leaving America is over. However, I am not sure how many will come back – many will.

Charles Payne
Wall Street Strategies


 

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