Auto industry ponders road ahead
Collision with Trump could alter the landscape
The auto industry’s showdown with Donald Trump over made-in-Mexico, sold-in-the-U.S. vehicles revved up Tuesday as General Motors and Ford moved to fend off attacks on their commitment to American manufacturing.
Ford announced it would cancel a planned $1.6 billion Mexico plant and expand a Michigan factory, creating 700 jobs, after withering criticism from Trump.
Earlier, General Motors was forced to defend its Chevrolet Cruze production in Mexico after Trump tweeted: “Make in U.S.A. or pay big border tax!”
The developments illustrate the new era of give-and-take for Detroit’s Big 3 automakers, whose relationship with the president-elect figures to be complex.
On one hand, there’s a gaping divide between U.S. automakers and Trump on trade. Trump wants to renegotiate or trash the industry’s treasured North American Free Trade Agreement, which he blames for weakening American manufacturing. He also has threatened a 35% tariff on American companies’ products made overseas and sold in the U.S.
In other ways, however, the auto industry is welcoming change, even after eight years of a White House that rescued GM and Chrysler from liquidation. “Automakers are facing a situation where they have to consider the political consequences” of their decisions, AutoTrader.com analyst Michelle Krebs says.
Some key questions for automakers:
Q: Does moving production back to the U.S. lead to higher costs?
A: Yes. Labor costs for automotive assembly are 80% lower in Mexico than in the U.S., according to a report in August
2016 by the Center for Automotive Research. Although security and transportation costs are higher in Mexico, the country still offers considerably lower cost of production, particularly on small, fuel-efficient cars with thin profit margins. So shifting production back to the U.S. likely would hurt the bottom line for automakers and suppliers. “That could have a pretty substantial impact on profitability,” LMC Automotive analyst Jeff Schuster says.
Q: Are threats of tariffs enough to prompt companies to bring back manufacturing?
A: Hard to say, since details are lacking. But few in the industry believe the threatened 35% tariff is actually feasible. “I believe 35% is almost inflammatory,” says Michael Harley, senior analyst at Kelley Blue Book, noting Ford’s 2016 profitability could have been wiped out if it had to pay the tariff. “It gets everyone’s attention, but it’s nearly impossible.”
Still, the pressure on the auto industry could be persistent. That could have major ramifications on future decisions on automakers’ global operations. “We’re going to see pressure from Trump and his tweets, and you are going to see public scrutiny,” he says.
Q: Does Ford’s announcement portend similar moves by other automakers?
A: Possibly, especially if automakers can pull off announcements that generate headlines for Trump to trumpet while making few substantive changes to their actual policies. Optics may matter more than substance.
But don’t expect a significant shift in manufacturing from Mexico to the U.S. The Center for Automotive Research projected that the U.S. share of North American automotive production would fall from an all-time low of 63% in 2016 to 58% in 2020.
Q: Will all these moves lead to higher car prices?
A: Not for now. If Trump follows through on the threat of a 35% tariff, Mexican-made cars will likely become more expensive for American consumers.
Theoretically, though, “it might end up with more jobs here,” Center for Automotive Research analyst Kristin Dziczek says. “If we have more jobs, more employment and wages go up, and prices go up too, that’s OK. If wages don’t go up and prices go up, that’s a problem.”
Q: Why might the auto industry capitulate on Mexico?
A: Ulterior motives. Although expanding in Mexico makes financial sense, automakers may be willing to relinquish some Mexico production plans in exchange for concessions in other areas. Currying favor with the Trump administration is important to the auto industry, which wants Washington to loosen fueleconomy regulations and avoid a potentially devastating trade war with China. Ford’s move reflects that strategy, Schuster says.
“There’s clearly a lot going on that’s below the surface of this,” Schuster says. “It’s likely to gain some influence on other activities that’s coming down the road.”