Ford Keeps Its Focus But Shifts Production to China

Ford Motor (F) will shift production of its Focus model to China, the company announced this week, instead of Mexico. The move is part of a strategic overhaul under new CEO Jim Hackett -- and a clear victory for free trade over protectionism.

One of Donald Trump's first big battles on being elected was with Ford. He ranted against the company's decision to build a $1.6 billion factory in Mexico, where it was going to make the Focus, and threatened a "big border tax."

Ford scrapped the plan for the Mexican factory at the start of the year. Now it's clear how many of those jobs moved to the United States: none. 

Ford knows what it is doing. At the same time as it announced that it was moving the bulk of Focus production to China, it said it would invest $900 million in its Kentucky truck factory to make revamped Expedition and Navigator models, full-size SUVs with high profit margins

The Navigator will be exported to China, it was at pains to say. And now, instead of Mexico, the Ford Focus will be imported into the United States from China. 

It originally made the Focus near Detroit, but production will cease in mid-2018. After it decided not to build a factory in San Luis Potosi, it wanted to move production to an existing plant in Hermosillo, Mexico. Now it has settled on Changan Ford Assembly Plant 1 and 2 in Chongqing to make the Focus instead.

It's interesting to parse Ford's statement, which has a political message -- U.S. production is thriving, and we're preserving 1,000 jobs in Louisville -- and an economic one: you have to make lower-cost, low-margin products in low-cost nations.

In fact, Ford says it will save $1 billion in investment costs by moving production of the Focus from Mexico to China: $500 million saved on not building the new factory in Mexico, $500 million saved because China is cheaper than retooling Hermosillo. New China-built models, more-spacious and "packed with technology," are due to arrive in 2019, with a few other Ford Focuses made in Europe.

At the time it scrapped the Mexico plan, Ford said it would invest $700 million in a plant in Flat Rock, Mich., where it would add 700 jobs to make electric, hybrid and self-drive vehicles -- high-tech, and presumably high-margin vehicles again. The Wayne, Mich., factory that was making the Focus will now convert to making the Ranger mid-size pickup and the Bronco midsize SUV.

When Ford scrapped the Mexico plant plan in January, it seemed you could chalk a major victory up to Trump, who also took General Motors (GM) to task on Mexican production. But Mark Fields, until last month Ford's CEO, also said the company was canceling the Mexican facility because of sagging demand for small cars in North America, and that it would have made the same decision had he not been elected.

Fields did say the dual moves were a "vote of confidence" for Trump and his pro-growth tax and regulatory policies. It will take such policy changes, rather than bullying over numbers that don't work, to make the United States more competitive as a production center. Companies that are moving offshore have made the decision. The question is not if, but where they go.

Ford has not lost its Focus in the move to China. In outlining the original for the Mexican factory, first hatched in 2015, Fields said the move was necessary to make its production of low-margin small cars competitive. And that is still the case, whatever Trump and other free-trade critics say.

"Within the next two to three years, the majority of our small vehicles will be produced in low-cost areas," Fields said, according to the Washington Post. "In North America, we will have migrated all of our small-car production to Mexico and out of the U.S."

All Fields and Ford have done is to remove "to Mexico" out of that sentence. Trump's "victory" is Pyrrhic, since rather than moving any of the jobs "lost" to Mexico back to the United States, companies faced with tariffs or import bans will simply move production to another low-cost nation.

Volvo, owned by Hangzhou-based Geely Automobile Holdings (GELYY) , started shipping China-made S60 sedans into the United States in 2015. General Motors (GM) last year became the first U.S. car company to import a China-made vehicle to the United States, Auto News notes, with the Buick Envision. Now it also makes the Cadillac CT6 plug-in hybrid there. China, already the world's largest car producer, has been courting car companies aggressively to move higher-end research and development functions to China.

I lived in North Carolina for nine years, which left me with a love of barbecue (it's pork, not beef, sorry) and college basketball. Go Heels!

Try as it might, North Carolina could not hang on to its traditional industries, textiles and furniture. The need to keep prices competitive meant those jobs had to move offshore. Agriculture has hung in there in N.C. - on the back of imported Mexican labor. Plus, no one else will have Big Tobacco anyway. 

There was a lot of hand-wringing over the dying industries, but North Carolina would have been better just to get on with preparing the state for the tech jobs it is creating around the Research Triangle. Those people make drugs and computers instead of clothing and chairs.

That's why the United States is in fact the big loser when it pulls out of deals like the Trans-Pacific Partnership, as I explained in January. The members of the TPP will get on fine dealing with each other, and may even forge a new deal without the United States. China, not part of the TPP, benefits, since it's no longer at a disadvantage on trade terms. And U.S. consumers are left with higher import duties, higher prices at the store -- and not one single extra job.

It would be equally dumb to withdraw the United States from NAFTA, and for Trump to slap the 35% tax he would like to see on Mexican imports into the United States. Mexico and Canada would continue to trade with each other without tariffs. U.S. companies, which currently deal duty-free on shipments to and from both countries, would lose a competitive advantage they gain in operating in both nations, near home and headquarters, but would simply look further afield for production.

In fact, another reason besides low wages that Ford found Mexico attractive was that it has many more free-trade deals than the United States. Ford would save about $600 on wages for a small Ford Fusion car made in Mexico instead of the United States, the Center for Automotive Research calculated. But it would save $2,500 in tariffs if it sold the Mexican car in Europe instead of a U.S-made one. 

It's not clear how Trump will respond to Ford's new move - the White House response has been muted. Maybe reality is sinking in after the tweeted headlines in January. Take on Mexico, and companies shift to China. Take on China, and they'll shift to Vietnam. Take on Vietnam ... well, the United States is unlikely to be a winner there.

The list of U.S. companies making products outside U.S. borders is a long one. But making it less attractive in one jurisdiction for them to send those goods "home" does not mean they will move production back home, too. They will simply find an even cheaper shore somewhere else.

Ford said its research before the move to China showed consumers care a lot more about quality and value than any sourcing location. Michelle Krebs, an analyst with Autotrader.com, probably put it best in her chat with The New York Times.

"Most people generally don't know where their car is built," she said, "and they don't care."

Source : http://realmoney.thestreet.com/articles/06/22/2017/ford-keeps-its-focus-shifts-production-china

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