We’ve all heard the story by now, across everything from the mass media to Donald Trump’s own Twitter feed: Ford has reconsidered its Mexican investment plans, and will instead expand a Michigan facility. Specifically, the Flat Rock plant that Ford used to operate with Mazda.
On the surface, this looks like another win for American manufacturing, courtesy of the President-elect.
But like so much media coverage, this news demands further scrutiny. As any manufacturing engineer will tell you, plans to allocate hundreds of millions – or even billions – of dollars worth of production capacity are not made on the back of a beer coaster. It can take years to bring a new facility online, and will certainly take months to plan and execute a major retooling operation.
The likelihood that Ford’s Mark Fields sat down for a chat with Trump and simply changed his mind about auto production in Mexico is ridiculous.
What’s really happening here is a sensible realignment of Ford’s production capacity to meet consumer demand. The fact is, gasoline is cheap in America, and looking like it will stay that way for some time. The inevitable result of cheap gasoline is an increased demand for fuel-thirsty light trucks and SUVs. Ford’s own F-150 is a perennial market leader in the light truck segment, and the firm’s SUV offerings are doing well too.
Take a look at this graph.
Light truck sales have soared over the last five years, while car sales are flat to declining. Not coincidentally, margins on trucks and truck-based products are astronomical.
Compare this to margins on small cars, which are vanishingly small; so small, in fact, that Fiat Chrysler’s Sergio Marchionne has plans to stop making them altogether. Add this to Ford’s increasing interest in ridesharing, alternative energy and autonomous vehicles, and you have a combination that makes Michigan a better bet than Mexico -- at least right now.
This raises a question: Did Trump promise Fields something extra, like he did with Carrier?
Maybe. However, I suspect that this announcement is either coincidental or, more likely, has been timed by careful coordination with Trump’s transition team to make sure that this news is branded as a win for the incoming administration.
If you love manufacturing like I do, then the auto industry is a glorious place to spend your career. If you are a bean counter, however, it’s a terrible business in which high overheads, lots of legacy costs and liability are combined with complex and expensive supply chains and low margins. It’s also an essential component of any advanced Western economy, which is why the automakers were bailed out despite appeals from the extreme Right to let them fail.
This movement is good business on Ford’s part, and nothing else. It’s about trucks, not Trump.