New CEO Cuts Costs: Ford shifts production of compact car from Michigan and Mexico to China.
The new guy at Ford, Jim Hackett, who became CEO a month ago after Mark Fields was forced out, said he had a mandate from Executive Chairman Bill Ford to crank up the company’s decision-making speed.
“Every CEO that starts has a 100-day clock ticking,” he said. “So I am working on a 100-day plan that is really coming along nicely.”
And sure enough, today Ford announced parts of that 100-day plan. “Manufacturing actions centered on improving the company’s operational fitness,” it called them. The biggie was that it would switch production of the “exciting new Focus” from plants in Mexico and Michigan to China, and that it will import those Chinese-made Focuses to the US.
Ford wouldn’t be the first major automaker to import China-made cars into the US. But in terms of sales, the Focus would be the biggest.
Volvo, owned by Geely in China, has been importing the China-made S90 sedan, but the numbers are small. And GM started importing the China-made Buick Envision SUV last year. So far, it has sold over 30,000 of them. By contrast, Ford sold 170,000 Focuses in the US in 2016. So this would be real numbers.
Production in China will start in the second half of 2019. Ford said that this plan “makes business sense – with no US employees out of a job.”
The Focus plant in Michigan will stop producing the Focus in mid-2018. The plant will be converted to building the Ranger midsize pickup and the Bronco midsize SUV. Ford’s statement points at what counts:
Ford is saving $1 billion in investment costs versus its original Focus production plan, improving the financial health of its Focus business, and further improving manufacturing scale in China – all helping create a more operationally fit company.
This $1 billion in savings includes some double-counting: the $500 million in savings Ford already announced on January 3 when it – after catching some tough Twitter-love from then President-Elect Trump – canceled plans to build a plant in San Luis Potosí, Mexico.
Ford executive vice president and president of Global Operations, Joe Hinrichs, rationalized the decision in inimitable corporate speak:
“At the same time, we also have looked at how we can be more successful in the small car segment and deliver even more choices for customers in a way that makes business sense.”
“Finding a more cost-effective way to deliver the next Focus program in North America is a better plan, allowing us to redeploy the money we save into areas of growth for the company – especially sport utilities, commercial vehicles, performance vehicles as well as mobility, autonomous vehicles and electrified vehicles.”
Compact-car sales in the US are in a world of hurt. Car sales in the US so far this year have plunged 11%. Truck sales are up 4.7%. And total vehicle sales are down 2%.
Profit margins on cars – pushed down by sagging demand and an ancient unwillingness by Americans to pay more for smaller vehicles – are thin. And making lower-end compact and subcompact cars in the US can be a losing proposition.
By contrast, trucks and SUVs have fat profit margins, as Americans don’t mind overpaying for them. And the volumes are larger. So when GM and Ford offer $10,000 or more in incentives on US-made trucks or SUVs, they’re still making money. When they offer $1,000 in incentives on US-made compact cars, those few they still make here, they’re in the hole.
Since mid-2016, GM, Ford, and Fiat Chrysler have been announcing layoffs, shift reductions, and plant-shutdowns for plants that build cars. The most recent layoff announcement hit GM’s Fairfax Assembly Plant in Kansas City, Kansas. On Friday GM notified workers that starting in September it would eliminate an entire shift and lay off 1,000 workers. In the statement, GM blamed “lower demand for passenger cars across the industry.”
The Trump administration has repeatedly lambasted automakers for assembling cars in Mexico. One of its big agenda items is renegotiating NAFTA to lower the incentives to manufacture in Mexico. But the administration has caved to China on trade – to recruit China’s help with North Korea? And Ford’s pivot to China is unlikely to be the only one.
But shifting production from the US and Mexico to China, as Ford is doing with the Focus, comes with a bad twist for the US-based component manufacturers.
For the Focus currently manufactured in Michigan, 46% of the components are sourced from US or Canadian suppliers, according to the National Highway Traffic Safety Administration, cited by the Wall Street Journal.
Ford’s and GM’s assembly plants in Mexico source many of the components in the US. There is heavy bilateral trade between the countries, precisely because of the sourcing of components.
But for vehicles built in China, components are mostly sourced in China, and to a smaller extent in other Asian countries. The component industry in China is huge as China has become by far the largest auto market in the world.
This shows in the Buick Envision that is sold in the US: 88% of its components are from suppliers in China, according to the NHTSA. US and Canadian companies get to supply only 1% of the components.
Ford and GM sell far more trucks than cars. But automakers whose lineup is concentrated on cars, face particularly tough issues – as seen by factory-fresh Hyundais stored on vast new gravel lots near the Mexican border. Read… Haunting Photos of #Carmageddon: Hyundai Gets Crushed, as GM, Ford, Others Struggle
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