Ford abandons Mexico plant plans after Trump attack but German OEMs commit

January 06, 2017

Ford has scrapped plans for a $1.6 billion (€1.5 billion) Mexico plant after President-elect Trump threatened to impose punitive tariffs in a ‘big border tax’ to scupper its plans to shift manufacturing south of the US border.  

Ford said that the decision was made due to ‘tax and regulatory reforms’ proposed by Trump, and instead will invest $700 million (€660 million) into its factory in Flat Rock, Michigan, creating 700 new jobs.  

The investment will be used to build 13 new electric and hybrid vehicles.  

Ford chief operating officer Mark Fields hailed the move as ‘a vote of confidence’ in Trump.  

The timing of the announcement is likely intended as a goodwill gesture by Ford to boost its image for the US public and incoming Trump administration. Michigan is in the Rust Belt of the North-Eastern Unites States that Trump has highlighted as part of his mission to revive declining industrial areas. Trump was the first Republican presidential candidate to win the state since George H.W. Bush in 1988.  

Ford had planned to invest in another Mexican plant but due to the decline in demand for small cars in North America as consumers favour SUVs and pickup trucks, the need for the plant had already been reduced. The Ford Focus, which was due to move to the new plant, will continue to be built in Ford’s existing plant in Hermosillo, Mexico. The overtures are also likely to sour relations between Mexico and the US. 

Meanwhile, German OEMs have reiterated their commitment to Mexico, with Daimler, Audi and BMW all intending to expand production in Mexico regardless of overtures by Trump. Ironically for Trump, who has threatened to scrap NAFTA – the US free trade agreement with Mexico – it is Mexico’s free trade agreements that make it so attractive. Mexico has trade agreements with 44 countries, compared to the US with just 20, meaning Mexican plants have access to half the global car market tariff-free. The German automotive industry association, the Verband der Automobilindustrie (VDA) has highlighted the importance of this free trade. It is not actually the lower wages of Mexican workers that make the difference because costs incurred due to Mexico’s poorer infrastructure compared to the US largely wipe out these savings. On a typical midsize car, $600 would be saved on labour costs compared to the US but it costs an additional $900 to ship the vehicle to the US and $300 more to ship it to Europe.  

If Trump goes ahead with his protectionist policies and threats to scrap NAFTA, alongside the Pacific Free trade Agreement, and abandon discussions with Europe over the Transatlantic Trade and Investment Partnership, the irony is that there will be even more incentive for US OEMs to transfer production to Mexico if they want to export their cars abroad and be able to compete with German OEMs and other carmakers expanding in Mexico.  

The news follows a scathing attack by Trump against General Motors (GM), threatening to slap a ‘big border tax’ on GM cars imported into the US from Mexico (which would require scrapping the NAFTA free trade agreement). Trump’s tweet at 7:30am sent GM’s shares tumbling 3% in premarket trading, before recovering. The tweet accused GM of ‘sending Mexican made’ Chevy Cruzes to the US but only 4,500 units were imported, while 172,000 were made in the US.  

Ford’s decision for its electric vehicle production is also likely to reflect the broad strategy of the company as electric vehicles become increasingly mainstream. Ford engineers working on electric vehicles are based in Dearborn, Michigan, 32km from the Flat Rock assembly plant. Keeping a new technology near the engineers is an important thing, at least in the first generation,’ said Brett Smith, analyst at the Centre for Automotive Research in Ann Arbor, Michigan. That gives them a lot more control to monitor a system.’

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