In the summer of 2008, with the Great Recession underway and Detroit’s auto industry in a free fall, Ford Motor took a big gamble: It would switch three of its North American assembly plants from building trucks and sport utility vehicles to making small passenger cars.
With gasoline prices rising above $4 (Dh14.68) a gallon at the time and truck sales plummeting, Ford was losing billions and — along with General Motors and Chrysler — teetering on the verge of bankruptcy.
The centrepiece of Ford’s transition was its plant in Wayne, Michigan. There, the company would replace production of big SUVs with that of compact cars, on the assumption that consumer demand had shifted permanently toward smaller vehicles.
“We don’t have a sustainable company if we don’t do this,” Alan R. Mulally, then Ford’s chief executive, said at the time. But eight years later, Ford, the nation’s second-largest automaker after GM, is once again reversing course in Wayne.
In a move that has drawn fire from Donald Trump and other critics of the North American Free Trade Agreement, Ford is giving up on making small cars in the US and plans to move production of its Focus compact cars from the Wayne factory to a new plant under construction in Mexico. Trump and others have criticised Ford for creating jobs in Mexico rather than in the US.
Fully staffed
Seldom mentioned by Ford’s critics, though, is an essential fact. The Wayne factory will remain fully staffed, with 3,700 workers, to build what Ford really needs now: more trucks and SUVs. There is no doubt that NAFTA has played a role in the migration of many American manufacturing jobs to Mexico in the last 22 years.
Before the trade agreement, US automakers barely had a presence in Mexico. Now, Mexico’s car-making workforce is about 675,000 strong, according to the Mexican auto industry’s trade association.
But the story of Ford’s Wayne plant makes clear that many factors determine the number of auto-making jobs in the US — a figure that according to federal labour statistics has actually grown by 200,000 jobs, to around 900,000, since the recession gave way to economic recovery in 2009.
The reasons include the state of the economy, the profitability of the vehicles being produced, the strength of the dollar, and how well or not each carmaker’s products are faring in the marketplace.
One big consideration now is the same as it was in 2008: the price of gasoline. But this time it is historically cheap gas — in the $2 range — that is helping determine the kind of cars that consumers want and that automakers therefore need to make.
Demand for SUVs
About three in five new vehicles sold in the US in September were trucks or sport utility vehicles, according to the research firm Autodata. Analysts see no sign that demand for roomy, utilitarian pickups and SUVs will abate as long as gas prices remain low.
Rather than a frenzied Nafta-driven flight to the bottom of the labour market, in other words, Ford’s retooling of its Wayne factory is more a nuanced reflection of the industry’s desire to keep pace with growing demand for high-profit trucks and SUVs, while continuing to produce less expensive car models at lower costs with the cheaper wages paid in Mexico.
Ford’s Wayne factory signifies the reality of the marketplace. Simply put, Detroit cannot make money producing small cars in the US, where an established union worker — not counting entry-level employees — might earn about $29 an hour, more than triple the wages of a Mexican employee.
Ford’s chief executive, Mark Fields, has vigorously defended the company’s Mexico strategy. He cites the 55,000 hourly workers the company employs in the US and the 25,000 jobs it has added since the depths of the recession. But he does not back down on the business rationale for moving the slow-selling Focus to Mexico and devoting higher-paid American workers to making popular trucks and SUVs.
Job loss
Trump and his advisers are not persuaded by Ford’s rationale, though. “It’s wonderful that Ford and other companies are offering consolation prizes while shipping tens of thousands of jobs overseas,” Scott Hagerstrom, the director of the Trump campaign in Michigan, said. “However, when you look at the devastation and job loss caused by Bill Clinton’s NAFTA in places like Detroit and Flint, I think it’s safe to say that American workers would prefer to have new jobs created in the US, instead of Mexico and elsewhere.”
Ford does not release profit margins on its various vehicles. But analysts generally say that each small car generates less than $2,000 in profit for an automaker, compared with as much as $10,000 for option-laden SUVs.
“Yes, we are moving small-car production out of Michigan down to Mexico, but we have to be customer-driven,” Fields said.
“In the lower segment of the market, customers want to have certain value, and we have to deliver that.”
Besides, Ford has its own market struggles to contend with. The US auto market, after its heady six-year recovery, has recently started slowing and overall was essentially flat in September.
But Ford’s vehicle sales were actually down sharply, by 8 per cent, from the same period last year. “Ford’s struggles on the car side are pulling its total numbers down, even as most automakers hold steady with the overall market,” said Karl Brauer, an analyst for the auto research firm Kelley Blue Book.
Painful cutbacks
GM and Fiat Chrysler — despite also downsizing their American workforces and factories during the last recession — share Ford’s desire to keep their remaining plants in the US thriving. After the painful cutbacks during the recession, the Detroit companies are loath to close any existing facilities, in part to keep peace with the United Automobile Workers union. What is more, plants like the one in Wayne are staffed by experienced workers and able to deliver high-quality products. The automakers are also intent on protecting their billions of dollars of assets in factories in the US that are already up and running. It is unlikely, though, that any Detroit automakers will invest in new manufacturing plants in the US. Mexico is simply too attractive an option for carmakers looking to add to their overall North American production capacity.
“Nine of the last 11 auto factories built in North America have been in Mexico,” said Harley Shaiken, a professor at the University of California, Berkeley, who has studied auto production trends over the last 30 years. “The fact is Mexico offers high productivity and low wages, and that is a hard combination to beat.”
Ford is hardly alone in expanding its Mexican production. GM is investing $5 billion to upgrade plants in Mexico. Toyota, Volkswagen, Honda and BMW are all adding jobs and products at their Mexican facilities.
Industry trends
And as with Ford, any manufacturing those companies keep in the US will probably involve more expensive vehicles whose margins justify higher labour costs of building them.
Given the broad industry trends, Ford has found it vexing to bear the brunt of Trump’s attacks. The company notes that it revamped its operations during the recession without resorting to bankruptcy and government bailouts as GM and Chrysler did.
The company’s executive chairman, Bill Ford, recently said he had met with Trump to state Ford’s case that it had been a responsible corporate citizen. “We are everything he should be celebrating in this country,” Ford said at an automotive forum in Detroit. “We pulled ourselves up by our bootstraps.”
