Made in America? Ford Motor Company’s Battles with Isolationism
A look at the impact of nationalist and isolationist movements on Ford’s capital investment decisions.
When the United States entered the North American Free Trade Agreement in 1994, it was coming off several consecutive years of trade surplus with Mexico. In the ensuing 23 years, the United States turned into a net importer from Mexico and racked up a trade deficit of $64B in 2016 [1]. Vehicles and automotive parts accounted for more than 100% of that deficit ($74B) and had a deficit nearly three times as large as the next most unbalanced category (electronic parts, $25B) [2]. As a result, President Donald Trump has repeatedly targeted NAFTA as the scourge of American manufacturing. In April 2016, much to Mr. Trump’s chagrin, Ford Motor Company announced that they would invest $1.6B in a new manufacturing plant in Mexico [3]. Trump’s aggravated response suggested life for Ford may not be so simple; Ford’s supply chain was the newest target in the global isolationist battles.
NAFTA Impact on Automotive Industry
The US Congress passed NAFTA in 1993 with bipartisan support. The agreement liberalized trade between the United States, Mexico, and Canada and provided American car companies with access to cheaper Mexican labor, leading to the boom of Maquiladoras in Mexico. For example, Ford assembles nearly all of its smaller cars in Mexico while keeping assembly of the higher margin trucks in the United States [4]. The current trade agreement includes a content provision that requires 62.5% or more of an automobile’s components to be manufactured in North America in order to avoid tariffs [5]. As a result, North American supply chains have become markedly more integrated. Before NAFTA, US content in Mexican-made cars was roughly 5%; today it is around 40% [6].
The three countries have entered into negotiations to “modernize” NAFTA with the United States’ number one stated goal of reducing America’s trade deficit [7]. United States Trade Representative Robert Lighthizer, armed with his copy of “The Art of the Deal,” has suggested increasing the content provision to 85% and introducing a new clause requiring 50% of the vehicle to be made in the United States [8]. Mexican and Canadian officials consider this unpalatable, but the uncertainty impacts long-term capital expenditure decisions that Ford makes today. In efforts to preserve American jobs, American officials may be increasing the cost to Ford of operating in North America, and therefore destroying more of the jobs they are trying to bring back.
Your Move, Ford
So how has Ford responded to its consistent Twitter-lashing? In January 2017, they announced that they would no longer build the new plant in Mexico but would focus on expanding existing Mexican capacity [9]. The news delighted “Made in the USA” stalwarts, but Ford more quietly announced in June that it would shift production of lighter vehicles to China in 2019. The Alliance for Automobile Manufacturers, the largest lobbying body for the US automotive industry, said that “rather than attempt to comply with such stringent regulatory requirements, it will make more economic sense for companies to shift production to low-cost countries, like China, and simply pay the 2.5% tariff to import the product into the US” [10].
But what happens if Donald Trump follows through on his bluster towards China? The administration’s stated goal is to have American car companies produce their cars in the US, but will they sacrifice Ford’s global competitiveness for political points?
The irony is that all of the headache over where to build plants may be a moot point as Ford transitions into autonomous technology. A recent New York Times Magazine article titled “Can Ford Turn Itself Into a Tech Company?” highlighted new CEO Jim Hackett’s target of releasing a fully autonomous vehicle by 2021 [11]. The longer-term future of the company appears to be in places like Pittsburgh and San Francisco and not so much in its scattered global plants.
Where To Go?
Despite its longer-term high-tech ambitions, Ford must still confront today’s nationalist movements and determine where to invest its $7B+ per year of capital investment [12]. Ford’s management must assume that the risks to producing in North America will continue. Both United States political parties are led by individuals who champion anti-free trade rhetoric. Andres Manuel Lopez Obrador, a populist leftist who has been critical of Mexico’s free-market policies, is a contender in next year’s presidential election [13]. Political movements across Europe and Asia share the same sentiment and suggest that Ford should optimize for political security rather than current favorable conditions.
Ford should be outspoken in its opposition to NAFTA overhauls and articulate the effects that political uncertainty has on employment. Otherwise, efforts to retain US manufacturing jobs may cause an iconic American company to spend more time abroad. At least until the autonomous future arrives, Ford will be stuck playing dodgeball with isolationism.
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[1] “Trade in Goods with Mexico,” (United States Census), https://www.census.gov/foreign-trade/balance/c2010.html, accessed November 2017.
[2] Patrick Gillespie, “Remove car imports, and US-Mexico trade deficit disappears,” CNNMoney, January 9, 2017, http://money.cnn.com/2017/01/09/news/economy/us-mexico-trump-cars-imports-trade-deficit/index.html, accessed November 2017.
[3] “Ford will move smaller car production to Mexico,” CBSNews, April 5, 2016, https://www.cbsnews.com/news/ford-will-move-small-car-production-to-mexico/, accessed November 2017.
[4] Michael Martinez, “Ford’s Hinrichs on how to improve NAFTA,” May 1, 2017, http://www.autonews.com/article/20170501/OEM11/305019958/fords-hinrichs-on-how-to-improve-nafta, accessed November 2017.
[5] http://www.latimes.com/business/la-fi-nafta-rules-origin-20170228-story.html
[6] Shannon O’Neill, “If NAFTA ends, Ford’s move to China will be just the start,” June 22, 2017, http://americasquarterly.org/content/if-nafta-ends-fords-move-china-will-be-just-start, accessed
[7] Summary of Objectives for the NAFTA Renegotiation, (Office of the United States Trade Representative), https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf, accessed November 2017.
[8] Keith Laing, “Automakers defending NAFTA, widening rift with Trump,” The Detroit News, October 24, 2017, http://www.detroitnews.com/story/business/autos/2017/10/24/auto-industry-bands-together-bid-save-nafta/106958722/, accessed November 2017.
[9] Paul A. Eisenstein, “Ford Cancels Mexican Plant but Is Still Moving Small Car Production,” NBCNews, January 3, 2017, https://www.nbcnews.com/business/autos/ford-cancels-mexican-plant-still-moving-small-car-production-n702761, accessed November 2017.
[10] Robbie Whelan, “US Pushes Stiffer Content Rules for NAFTA Car Makers,” Fox Business, November 9, 2017, http://www.foxbusiness.com/features/2017/11/09/u-s-pushes-stiffer-content-rules-for-nafta-car-makers.html, accessed November 2017.
[11] Kevin Roose, “Can Ford Turn Itself Into a Tech Company?,” New York Times Magazine, November 9, 2017, https://www.nytimes.com/interactive/2017/11/09/magazine/tech-design-autonomous-future-cars-detroit-ford.html?rref=collection%2Fsectioncollection%2Fmagazine, accessed November 2017.
[12] “Trump’s NAFTA autos goals to collide with industry as talks start,” CNBC, August 14, 2017, https://www.cnbc.com/2017/08/14/trumps-nafta-autos-goals-to-collide-with-industry-as-talks-start.html, accessed November 2017.
[13] Santiago Perez, “Mexican Presidential Candidate Calls For NAFTA Talks To Be Suspended,” Wall Street Journal, August 30, 2017, https://www.wsj.com/articles/mexican-presidential-candidate-calls-for-nafta-talks-to-be-suspended-1504137175, accessed November 2017.
This article does a very good of highlighting the complexity and interdependency of the automotive supply chain something I generally feel is missing from the current political rhetoric. In general, the focus seems to fall mostly on where final assembly takes place while ignoring the upstream components. What I think NAFTA has been very successful in doing is keeping a much larger part of the automotive supply chain in North America (spread across all three countries) because the final assembly is happening at a competitive price in Mexico. In a world where more final assemblies are completed overseas, I believe more of the upstream steps will also move overseas to keep the supply chain integrated. I agree that Ford (and the broader automotive industry) need to ensure their opinions about NAFTA are known, including the larger impact a change could have on the entire production ecosystem.
To your point about autonomous cars and the shift to being a technology company, I completely agree that if successful this will shift the centers of knowledge in the automotive industry. However, I don’t believe (at least in the medium term) that the proliferation of autonomous vehicles will fundamentally alter the manufacturing process and the industry will still largely be dependant on the same infrastructure. For this reason, I believe it’s imperative that the industry continues to invest in completing manufacturing in the most efficient way possible despite all the unknowns (political, technological, etc.) that could impact their decisions.
I found this article very interesting because Ford could be at the center of a powerful wave that is redefining the boundary of international supply chains.
On how Ford is reacting to the current administration protective measures, I do agree with the fact that U.S. manufacturers are adopting to this new age by both signaling one direction (With cancellation of the new Mexican plant) and simply just going the other when the economic incentive is just very clear (With the new light vehicle plant in China).
However, I do believe that the current administration rose to power on a influential underlying trend in the U.S. economy. If we look at historical data, over the past decades when globalization was taking place, although both import and export nations often mutually benefited with relative trade advantages, the parties in the developed market that benefited the most from this trend was the holders of capital instead of the labor population themselves. This means an equable means of sharing of wealth and success could be at the heart of the issue in developed market.
Awesome article, Jeff. Based on work that I did with Ford over the summer, the Asian market and particularly China is poised to see the largest growth in small cars and small/medium SUV models. This might be the true driver of Ford’s decision to shift or add production in China. However, I believe the company should do as they are and use this action in their argument to the Trump administration on how eliminating or modifying NAFTA in a negative way would impact Ford’s propensity to produce in the US. On a similar note, Ford recently announced that it would be importing the EcoSport (small crossover) from India [1]. Consumer demand is shifting toward smaller utility vehicles and as this happen it will place more pressure on Ford as these cars have lower price points and therefore lower margins – making production/labor cost an even more important factor. Moving forward, it will be interesting to see whether or not Trump “shoots the shot”.
[1] https://www.usatoday.com/story/money/cars/2016/11/15/fords-new-ecosport-suv-imported-india/93859452/
I think the impact of autonomous cars is a huge consideration here, and should probably get more weight than we are giving it. Optimists are predicting that every new car will have autonomous capabilities in the next 5-10 years [1]. That is something that Ford should absolutely be thinking about today. While this adds a large new step to the supply chain with the software component likely being implemented initially in San Francisco, I agree with “D”, and wonder how much autonomous capabilities will impact the current supply chain for the car itself. Even though there will be more focus on software and experience the physical car body still needs to be created. Autonomous cars might not have that much of an impact on Ford’s supply chain and how it thinks about isolationist policies, but it absolutely should be top of mind for any decision being made.
[1] https://techcrunch.com/2016/09/15/the-end-of-the-automotive-supply-chain/
Great article, Jeff! In this case, we see that the increasing political support for isolationism, with the intention to keep job opportunities within the U.S., poses challenges for Ford’s international supply chain. From your research, isolationism seems to fail give the job opportunities back to the people in the states, but instead forces Ford to look for other opportunities to reduce its cost.
With current technology that allows easy communication and trading across countries, I believe politics cannot stop the megatrend of globalization. Globalization is not only a revolution in supply chain, but also reflects current customer demand. The demand for Ford in international market continues to grow. Globalizing and choosing manufacturing factories to be closer to consumers as well as supply chain serves as a competitive advantage for Ford. I think Ford should continue its strategy to shift production to China in order to capture the increasing demand in Asia market. On the other hand, domestically Ford should increase its operational efficiency, for example, increasing output rate or upgrading its design to be more economic on raw material, to compensate for higher labor cost and ensure sustainability for local production.
Jeff: thanks for the thoughtful article! I found it interesting that Ford decided to shift light vehicle production to China despite President Trump’s isolationist trade stance. It shows that political rhetoric alone is not enough to keep or create the much needed manufacturing jobs in America in a world where companies are competing against each other on a global scale. Mere trade barriers do not address the root cause of why American jobs are being offshored in the first place. For example, this Forbes article highlights how American automakers lost competitive advantage against Japanese players partly due to their legacy defined benefit pension obligations. [1] What’s needed to bring jobs back are more profound policies to improve cost competitiveness of producing in America – lower taxes, better technical education and worker training programs, and perhaps some moderation on the power of unions. All these entail tough domestic choices tending to pit one group of constituents against another within America, and will therefore cost politicians votes. Anti-trade policies just happen to offend no domestic voters because they place the blame on foreign exporters.
I am less optimistic than Jeff in believing that autonomous vehicles will render the trade debate moot by bringing jobs to American innovation centers like Pittsburg and San Francsico. Chinese companies like Baidu are competing head-on with U.S. tech and auto companies in the race towards autonomous driving. [2] There is no guarantee that Ford will be able to produce autonomous vehicles more cheaply in America than outsourcing/offshoring manufacturing to a different country, which will raise the same problem for domestic jobs.
[1] Joann Muller, “Ford’s Leaky Pension Boat Is A Multi-Billion Dollar Problem,” Forbes, https://www.forbes.com/sites/joannmuller/2013/01/31/fords-leaky-pension-boat/#684923d34ef4.
[2] Darrell Etherington, “Baidu Plans to Mass Produce Level 4 Self-Driving Cars with BAIC by 2021,” Techcrunch, https://techcrunch.com/2017/10/13/baidu-plans-to-mass-produce-level-4-self-driving-cars-with-baic-by-2021/.
Super interesting, thanks Jeff! I agree with the above comments that autonomous vehicles themselves won’t necessarily cause a relocation of production facilities to the US. However, perhaps the increasing pervasiveness of Industry 4.0 – also known as smart manufacturing or the Industrial Internet of Things (IIoT) – may be a stronger driver. The biggest challenge associated with Industry 4.0 is data security and this “could become particularly tricky for OEMs looking to move data across borders” given the threat of intellectual property theft, especially in the Far East [1]. Furthermore, the data risk increases as OEMs share information with suppliers, which will cause them to be more selective of their business partners to ensure trust and appropriate control systems, potentially favoring domestic players.
[1] https://www.automotiveworld.com/analysis/industry-4-0-rise-smart-manufacturing/
I think Trump’s measure will be more harmfull than helpful to the American jobs as you suggested. Even though the impact on Mexican plants in huge, the labor expertise in Mexico and the infrastructure is already in place, and if not Ford, there are other international manufacturers that could use mexican labor force. Just as suggested, instead of increasing american jobs, these will only shift to China. I think the best move Ford has to move is lobby against the change and really work with NAFTA negotiators in order to ensure an outcome that will be favorable for all parties.
I guess manufacturing in the US gives an auto brand a premium image. They customers might respond to the practice in a positive way, given that auto is a relatively luxury product. When the government put high import/export tariff on the business, the companies don’t have a lot options. However, an argument to such regulation could be the government can encourage the companies to put a more value-add work in the US and outsource the low value-added work. Faced with high tariff or governor’s regulation, the company can choose to produce the WIP outside the US but assemble the WIP into Finished Goods in the US. However, I don’t think the change on the manufacturing locations is adding value to the overall supply chain, but it is purely a political fight.
Excellent article! I was especially surprised by the reaction of Ford to the increased pressure to produce in the U.S. by shifting to production in China instead. It seems that the benefit is twofold for Ford. First, they can lower the costs to build, benefit from lower labor costs and just paying the tariffs, Second, they can profit from having an increased presence in China: there is enormous potential for automobile companies with the continuous increase in Chinese affluence.
When I began reading your article, I thought: for sure what Ford’s going to propose is moving more of its production to the U.S. with a highly automated production line, thus reducing the potential for generating jobs. This may be partially unrelated to isolationism, but I had never considered the negative impact that autonomous vehicles may have for car manufacturing. In a future where we may no longer own cars and just use Ubers and Lyfts everywhere (at least in urban areas), there will be a reduced demand for vehicles as these are better utilized.
Great article Jeff,
Building on Alvaro’s point, I wonder how much of management’s decision to move production to China was actually predicated on exporting those cars to the USA. According to me, more benefit can be derived by diversifying the consumption base and diversifying into growing markets such as China and India. Furthermore, labour costs in China have been rising rapidly over the last decade, and so I question the long term benefit of making vehicles in China to export to the USA.
Jeff – great post! You’ve presented a complex issues in a very digestible way. I also really appreciated the inclusion of the video. You highlight how changes to trade policy can have unintended consequences – namely Ford moving production to China to avoid dealing with potential new regulatory requirements that were intended to keep more jobs in the U.S. Ironically, China is also a hot topic in the trade discussion these days and there is a lot of uncertainty around what trade conditions will be going forward. I’m curious to learn more about how a company like Ford makes big stakes decisions like where to invest in the midst of so much uncertainty… not an easy job!
As for the discussion on autonomous vehicles, similar to “WhitneyQ,” I agree that manufacturing autonomous cars must be top of mind for Ford given the industry’s optimism that the capabilities will be mainstream in the near future. I’d love to hear more about how you think the switch to manufacturing autonomous vehicles will change the supply chain for Ford. On the surface it appears much could remain the same – the physical car still needs to be built even if a machine is at the wheel instead of a human. I don’t think I’m quite as confident that we’ll see massive swings in Ford investments in places like Pittsburg and San Francisco instead of their current manufacturing spots like China and Mexico.