Ford: Fusion Across Borders
Ford should continue manufacturing cars in Mexico–despite Trump's insistence to stop–in order to remain cost-competitive and relevant.
Follow this link to read article
Ford: Fusion Across Borders
In January 2017 Ford Motor Company canceled its plans to build a new $1.6 billion plant in Irapuato, Mexico that was earmarked to manufacture the Ford Focus, the company’s best-selling model. The move followed President Trump’s threat to impose a 35% tariff on cars imported from Mexico to the USA, aimed at repatriating manufacturing jobs and reducing the Mexico-USA trade deficit. This protectionist movement upends Ford’s supply chain and jeopardizes its cost structure. Rather than yielding to political pressures, Ford should continue to invest in Mexico to remain cost-competitive while refocusing its American workforce on higher value-added activities to secure Ford’s continued relevance in the rapidly-changing automotive landscape.
The introduction of the North American Free Trade Agreement in 1994 fostered the integration of supply chains across North America, enabling Ford to capitalize on Mexico’s lower production and sales costs in order to become more competitive globally. As shown in Exhibit 1, the cost advantage of producing a Ford Fusion in Mexico versus in the USA is $4,300 and $1,200 for units sold in Europe and the USA, respectively. The difference is driven by lower assembly line wages, less expensive materials, and reduced tariffs for units sold overseas, resulting from Mexico’s 12 free trade agreements.
Exhibit 1: Comparison of Ford Fusion Production Costs in Mexico vs. USA
Cost difference between USA and Mexican production for sale in the USA (USD$)
Cost difference between USA and Mexican production for sale in Europe (USD$)
|Assembly plant labor||
$600 less in Mexico
$1,500 less in Mexico
|Transportation to market||$900 more from Mexico||$300 more from Mexico|
|Tariffs||$0||$2,500 less in Mexico|
|Total cost advantage||$1,200 less costly to produce in Mexico for sale in the United States||$4,300 less costly to produce in Mexico for sale in the United States|
|Source: Center for Automotive Research|
Contrary to President Trump’s allegations, NAFTA did not provoke an outsourcing of the American automotive supply chain, but rather an integration of operations across North America. According to the Center of Automotive Research, automotive components cross North American borders as many as eight times before being assembled, and the Wilson Center estimates that 40 cents of every dollar imported from Mexico to the USA is “Made in the USA” content, compared to only five cents for products imported from China. Because of this supply chain integration, Ford can leverage the entire continent’s competitive strengths to compete more effectively against lower cost manufacturers, particularly from Asia.
Ford has taken measures to counter the costs of curtailing its investments in Mexico. During the 2017 shareholder meeting, CEO James Hackett announced initiatives to cut materials and product engineering costs over the next five years by $10 billion and $4 billion, respectively, by rationalizing specifications throughout the product line, sharing more parts across vehicles, and cutting new product development times by up to 20%. Additionally, the company announced that the production of the Ford Focus, originally planned for the cancelled plant in Mexico, would be transferred to China, where operating costs are lower and there is more available production capacity than in the USA.
These measures are a temporary fix to Ford’s political pressures and investors’ concerns. If President Trump’s protectionist march continues, Ford will inevitably be forced to re-shore operations from China as well. This will require substantial investment in new American plants, since the current ones are already operating near full capacity[i], and new factories will have to be largely automated to maintain their cost competitiveness. Ford’s cost structure will likely still be higher than it is in Mexico, especially if it makes similar automation investments across the border, and few American jobs will be created, [ii].
Instead of capitulating to political pressures to repatriate manufacturing jobs, Ford ought to continue investing in Mexican manufacturing capacity while retraining its USA work force in higher value-added skills, such as materials science and artificial intelligence. In a world in which companies like Uber, Lyft, Tesla and Google are redefining personal transport, it is not manufacturing, but the ability to innovate and self-disrupt that will sustain the vitality of the USA automotive industry. The looming question is: what changes does Ford need to make to its American operations to successfully transition to the networked economy? Will the Trump administration support this transformation, or will it continue clinging to the manufacturing economy of last century?
[Word count: 747
[i] According to the Center for Automotive Research, automotive manufacturing plants were already operating at 96% of capacity in 2014.
[ii] Oliver Wyman estimates that a recent $1.2 billion plant modernization plant by Ford in the USA created a mere 130 jobs.
 Menk, D., & Swiecki, B. (2016, July). The Growing Role of Mexico in the North American Automotive Industry – Trends, Drivers and Forecasts. Center for Automotive Research. Retrieved from http://www.cargroup.org/publication/the-growing-role-of-mexico-in-the-north-american-automotive-industry-trends-drivers-and-forecasts/
 Secretary of the Economy of Mexico. (2016, May 30). Secretary of the Economy. Retrieved from https://www.gob.mx/se/articulos/mexico-cuenta-con-12-tratados-de-libre-comercio?idiom=es
 Dziczek, K., Swiecki, B., Chen, Y., Brugeman, V., Schultz, M., & Andrea, D. (2017, January). NAFTA Briefing: Trade benefits to the automotive industry and potential consequences of withdrawal from the agreement. Center for Automotive Research. Retrieved from http://www.cargroup.org/publication/nafta-briefing-trade-benefits-to-the-automotive-industry-and-potential-consequences-of-withdrawal-from-the-agreement/
 Wilson, C. (2011, December 13). Working Together: Economic Ties Between the United States and Mexico (Rep.). Retrieved
 Ford Motor Company, Investor Relations. (2017, October 3). CEO Strategic Update [Investor Presentation]. Retrieved from http://shareholder.ford.com/news-and-events/events/2017/10-03-17
 Ford has a clear plan to fix its present failings. (2017, October 5). The Economist. Retrieved from https://www.economist.com/news/business/21730056-puzzle-future-carmaking-remains-unsolved-ford-has-clear-plan-fix-its
 Vlasic, B. (2017, June 20). Ford Chooses China, Not Mexico, to Build Its New Focus. The New York Times. Retrieved from https://www.nytimes.com/2017/06/20/business/ford-focus-china-production.html
 Kautzsch, T., & Chien, A. (2017, October). Bringing Manufacturing Jobs Back to the US? (Rep.). Retrieved
Student comments on Ford: Fusion Across Borders
Ford and other car producers are facing a risk of very high tariffs for importing cars to the USA. If the US administration implements such laws, the risk for Ford is very high, potentially even becoming bankrupt. Therefore, moving at least part of the production to the US could be a risk-mitigation strategy.
Despite the fact that Ford should lobby against high tariffs and retrain the US workforce to value-added services, it still needs to implement some strategies against potential risk of tariffs. Completely disregarding the current trend of isolationism and Trump’s push to move jobs to the USA, would be irresponsible on Ford’s side.
Another way to deal with the problem of protectionism and offshore manufacturing is focusing on automating more of Ford’s manufacturing processes. Since the cost arbitrage is largely in labor- cars require more labor content to assemble than most other manufactured goods- automation could actually bring the optimal cost structure closer to the US. This would also be an interesting side effect of increased protectionism- lower labor content overall in the system structurally eliminates US manufacturing jobs, running counter to the stated mission of America First.
Luckily for Ford, the entire industry is facing a similar decision with around the same cost-benefit analysis. Even foreign car manufacturers have in recent years shifted production to the US to minimize shipping costs and ensure timely production to be a viable player in one of the larger car markets in the world. This means that, ultimately, none of this puts Ford at a competitive disadvantage. Furthermore, the industry is likely going to just pass the additional costs in its production process along to consumers, unless certain companies are more successful than others at automation.
This was an interesting read on how political pressures are affecting the globally integrated supply chain, something that companies cannot control. While I agree with you that President Trump’s threat is economically counterproductive, I think that Ford needs to take a cautious approach in continuing to invest in Mexico’s manufacturing capacity. It is becoming increasingly critical for global companies like Ford to develop contingency plans to reduce the potential risks from these uncertainties. Ford is not only facing the threat of NAFTA negotiation, but also the growth of automation in the industry. In this case, Mexico will become less attractive as an offshore production alternative to the US.
Great article Alberto! I agree that Trump’s trade policies are short-sighted, but I disagree with your assertion that Ford should move forward with building the Mexican plant (at least for the time being). President Trump has shown that he is willing to call out and criticize companies by name. If Ford challenged the president and moved forward with building the plant, Trump may have tried to make an example out of Ford by publicly punishing them with a tariff. Furthermore, Trump supporters may have boycotted Ford. Trump’s position and following give him the power to decrease Ford’s revenue and increase their costs. I would argue that Ford would be better off by trying to fly under the radar.
Good read Alberto! You have real knowledge here I know. I do agree with Hchoi and Anonymous 8 though that no matter how unfortunately, it is best for Mexico to do all it can to reduce the risk of being a target of punitive legislation from the current administration.
Zack, I am curious why you think ultimately it will be much more costly to automate the factories for Ford. Initially, I agree that Ford will incur huge expense and switching cost establishing these factories and implementing these technologies, then perfecting them. But I found the cost of a robot per hour on the assembly line is roughly a quarter of the cost of human labor. I understand how this first effects the low-skilled workforce, and we are years away from the machine labor force realistically being cheap/reliable enough to fully displace humans. But ultimately would these cost savings hit the bottom line?
I’m curious to learn more of the long term implications of other Central and South American labor/manufacturing markets to use this current NAFTA issue and the decreasing global frieght costs to disrupt Mexico as a the prominent manufacturing player south of the US. Does this shift in regulation level the playing fields for those other nations?
Thank you for this interesting article, Alberto! This reminds me of Fuyao case as it is crucially important to take into account not only cheap production and wage cost in a market but also the political influence, in this case the impose of tariff on imported cars. One potential solution that I have seen some manufacturers do in Asia would be to pre-manufacture all the parts and assemble into a near finished good before importing into the country to avoid such tariff. This way, Ford can limit its labor cost incurred in the US to the minimum while take advantage of lower wages in other markets like Mexico and China.
As for your question around the US capability building to succeed in networked economy, I do agree that Ford should double down on its innovation and disruptive technology in transportation. For example, they announce to offer the new Advanced Driver Assist Technology in which Ford cars can back itself into a parking space . Or even explore the investment in other mode of transportation like drone.
 Mearian, Lucas. “Your next Ford will be able to back itself into a parking space.” Computer World. https://www.computerworld.com/article/3138506/car-tech/your-next-ford-will-be-able-to-back-itself-into-a-parking-space-steer-around-traffic.html. Accessed on December 1, 2017.