Ford Motor Company: supply chain uncertainty in a post-NAFTA world

The US auto industry is bracing for changes in trade policy that will ripple through North-American supply chains, affecting both the wallets of domestic consumers and the future of company employees.  

The political climate of 2016-2017 made it clear that liberalism—and by extension, globalism—is on its heels.  Challenged on both ends of the political spectrum, economic growth has been cast as a zero-sum game, leading to protectionist policy proposals and an outcry against the free trade policies that defined the 20th century.  In the United States, this has led to the ongoing renegotiation of NAFTA, a trilateral trade agreement between the US, Canada, and Mexico that has been criticized for outsourcing US jobs while spurring trade across North America [1].

Ford Motor Company is a Michigan-based automotive company that manufactures and sells automobiles globally.  With $94 billion in US sales (63% of global sales), but only half of its 200,000-person workforce located in North America, Ford depends on an integrated global supply chain to source and manufacture vehicles [2].  Despite advances in automation, vehicle manufacturing remains a labor-intensive process, with labor driving significant variable costs in manufacturing.  As a result, Ford has increasingly moved its low-margin production of cars to Mexico, where labor costs are significantly less than the US and NAFTA ensures tariff-free cross-border trade [3,4].  The US government has recently begun the long process of renegotiating NAFTA to increase import restrictions and return jobs to the US, creating two significant concerns:

  • If the cost of importing finished goods from Mexico increases due to new tariffs, where should Ford manufacture goods destined for the US market?
  • If the US institutes higher tariffs on imports, will other nations respond in kind, resulting in increased costs for imports to all target markets?

In the short-term, Ford has adopted a strategy that strengthens its core profitable unit, the “light truck” segment, and ensures that it is 100% manufactured in its target market—the US.  Due to its relatively high margins and local sourcing of raw materials, Ford has been able to maintain light truck manufacturing in the US despite higher labor costs. This guarantees that Ford’s most profitable unit will be largely unaffected by an increase in import tariffs [5].  Conversely, Ford has moved production of its low-margin cars to Mexico, where labor costs are low and trade agreements allow them to export to South America and Asia at low cost [1,5,6].  To further offset the risk of eroding margins, Ford has expanded its business in Asia, where demand has continued to grow [5].

In the medium term, Ford has adopted a strategy of modernization and diversification.  Focused on the future, Ford has planned an aggressive push to increase factory automation and upgrade design technology to support cost reduction [7,8].  While it is unclear what effect NAFTA negotiations have had on its modernization process, it is likely that a revised NAFTA could increase labor costs, accelerating this process and enabling Ford to reduce the size of its labor force.  Ford is also focused on diversifying its business model, transitioning from automobile manufacturing to “mobility services” [7,8].  With the development of autonomous cars, and the proliferation of ride-sharing and connected devices, Ford envisions its future as the creator of an ecosystem of mobility and transportation services that would be entirely unaffected by import tariffs [7,8].

With NAFTA changes on the horizon, and potential cascading implications for all US trade partners, Ford should be focused on establishing local infrastructure in its highest growth global markets.  With significant opportunity for reduced production costs via vertical integration in China, and the looming loss of free trade between the US and Mexico, Ford should examine costs across its ASEAN supply chain and prepare for the possibility of transitioning a greater portion of its production to China [4].  This transition would have an outsized effect on the US labor force, which currently has a substantial supporting market that provides the raw materials and produces partially finished goods for Ford production lines in Mexico [4,6].

The final form of NAFTA will impact the decisions Ford must make in 2018.  In the case of a drastic NAFTA revision, Ford may need to shift its global supply chain, necessitating an increase in prices among historically low-priced cars.  How will this effect price-sensitive customers in the US? Even if NAFTA remains largely intact, Ford will have to continue to choose whether to move factories to Mexico while being under intense political pressure from both Washington and powerful unions.  Beyond the short-term renegotiation of NAFTA, if isolationist movements succeed at achieving stated objectives—effectively reducing the competitive advantage of manufacturing in Mexico—auto manufacturers like Ford Motor Company will be forced to reevaluate the efficacy of Mexico-based production, resulting in higher prices for consumers and reduced domestic employment along the entire supply chain.

Word Count: 789

 

[1] Luke Sharrett, “Trump’s NAFTA autos goals to collide with industry as talks start,” Reuters, August 14, 2017, https://www.cnbc.com/2017/08/14/trumps-nafta-autos-goals-to-collide-with-industry-as-talks-start.html.

[2] “10K Annual Report,” Ford Motor Company, 2016, http://shareholder.ford.com/~/media/Files/F/Ford-IR-V2/annual-report/2016-annual-report.pdf.

[3] Michael Martinez, “Ford’s Hinrichs on how to improve NAFTA”, Automotive News, May 1, 2017, http://www.autonews.com/article/20170501/OEM11/305019958/fords-hinrichs-on-how-to-improve-nafta.

[4] Shannon O’Neil, “If NAFTA Ends, Ford’s Move to China Will Be Just the Start,” June 22, 2017, Americas Quarterly,  http://americasquarterly.org/content/if-nafta-ends-fords-move-china-will-be-just-start.

[5] Bob Shanks, “CFO Let’s Chat,” Ford Motor Company, March 23, 2017, http://shareholder.ford.com/~/media/Files/F/Ford-IR-V2/events-and-presentations/2017/03-23-2017/lets-chat-march-2017.pdf.

[6] John Rosevear, “Why Donald Trump’s NAFTA Plan Will Cost Ford and General Motors Billions,” Fox Business, November 13, 2016, http://www.foxbusiness.com/markets/2016/11/13/why-donald-trump-nafta-plan-will-cost-ford-and-general-motors-billions.html.

[7] “CEO Strategic Update [Transcript]”, Ford Motor Company, October 3, 2017, http://shareholder.ford.com/~/media/Files/F/Ford-IR-V2/events-and-presentations/2017/10-03-2017/ceo-strtegic-update-transcript.pdf.

[8] “CEO Strategic Update [Presentation]”, Ford Motor Company, October 3, 2017, http://shareholder.ford.com/~/media/Files/F/Ford-IR-V2/events-and-presentations/2017/10-03-2017/Ford-CEO-Strategic-Update-presentation.pdf.

 

 

 

 

 

 

Previous:

Enjoy that cup of coffee, it may be your last…

Next:

CEDIAM: a fruit processor sees its future in banking

7 thoughts on “Ford Motor Company: supply chain uncertainty in a post-NAFTA world

  1. UserError, this is a great post! Not least because I wrote about General Motors and completely overlooked the impact that protectionism could have on prices!

    Having posted about General Motors, I think it’s interesting to note that protectionism is impacting major US automakers in similar ways. Like Ford, GM is manufacturing certain in-demand US cars entirely in the US. And similar to Ford, GM’s lower-margin cars (e.g. the Buick Envision SUV) continue to be produced internationally (the Buick Envision SUV is made in China) in order to capture important cost efficiencies. While losing free trade between the US and Mexico looms large under a revised NAFTA, I fear that the future of trade between the US and China isn’t promising either. Earlier this year, President Trump championed a 45% tariff on imports from China. This raises the stakes for automakers like Ford and GM tremendously because transitioning production to China becomes significantly less appealing.

    If automakers such as Ford confront costly trade restrictions that they are unable to absorb, the US economy stands to suffer. As you say, when automakers are hit with increased production costs resulting from trade tariffs, they will either pass costs to consumers by raising prices, or try to cut costs by cutting labor. For better or worse, the advent of new technology creates pathways to reduce labor costs through automation, which invariably means fewer jobs. In addition, an adverse impact on the auto industry could cascade to other industries that depend on the production and trade of automobiles, including steel, rubber, glass, and freight (specifically carriers that transport cars), among others. Hence, trade restrictions that have the potential to erode profits, and as a result limit production, should be evaluated with caution, lest we ultimately lose more than we gain.

  2. You raise a number of key points in your assessment of the impact that a NAFTA revision could have on Ford’s manufacturing operations. I agree that due to Trump’s protectionist policies, Ford may need to shift its global supply chain and establish local infrastructure in other markets. In fact, Ford has already announced that it will be investing more heavily in its Kentucky plant and in Chinese operations. [1] However, I would argue that Ford shouldn’t only be concerned with building manufacturing capacity in “its highest growth global markets.”

    There are other key factors management must consider, apart from areas in which consumer demand is high. Input costs, such as labor and shipping costs, must be taken into account. In addition, political factors, including trade and tax policies and political stability, need to be considered. In addition, the ability for foreign plants to reliably meet American safety standard regulations may also be an area of concern. It could be difficult for Ford to monitor and enforce these regulations. Ultimately, given political uncertainty both at home and abroad, I think it’s still unclear whether the ultimate cost of cars produced abroad will be greater or less than the cost of cars produced domestically.

    In answer to your question on how shifts in Ford’s supply chain will impact consumers in the U.S., I think that the answer is depicted in the declining sales numbers that the American auto industry has been posting this year. [2] The sales decline has been driven by increased competition both at home and abroad and due to increased market uncertainty. As such, Americans are shifting towards cheaper alternatives, particularly cars produced in Asia. [3] This shift in consumer behavior will continue to have negative repercussions on American auto makers until Trump liberalizes U.S. trade policy.

    [1] Vlasic, Bill. “Ford Chooses China, Not Mexico, to Build Its New Focus.” The New York Times, The New York Times, 20 June 2017, http://www.nytimes.com/2017/06/20/business/ford-focus-china-production.html.
    [2] Lawrence, Eric D., and Nathan Bomey. “GM Sales down 15.4%, FCA Drops 10%, Ford down 7.5% for July.” Detroit Free Press, Detroit Free Press, 1 Aug. 2017, http://www.freep.com/story/money/cars/2017/08/01/gm-ford-fiatchrysler-auto-sales-july/527521001/.
    [3] Butters, Jamie, and David Welch. “U.S. Auto Market Slump Persists.” Bloomberg.com, Bloomberg, 1 Aug. 2017, http://www.bloomberg.com/news/articles/2017-08-01/fiat-chrysler-july-sales-fall-as-u-s-auto-market-slump-persists.

  3. This was a thought-provoking post! I was particularly interested in the tension between renegotiating NAFTA with the goal of returning jobs to the U.S. and Ford’s medium-term strategy of reducing labor costs by increasing automation. According to a study by Ball State University, approximately 4.4 million factory jobs have disappeared since 2000 due to increased productivity due to automation.[1] Automation has clearly proven to be effective in cost reduction; for example, BCG has estimated that it costs $8/hour to use a robot for spot welding in the automotive industry versus $25/hour for a worker.[2] Based on this, it seems that it may be largely futile to attempt to bring automotive manufacturing jobs back if they will be automated away in short order.

    As an alternative to outright automation, Ford could consider the approach that Toyota is taking, namely using machines to supplement human work, believing that “[m]achines are good for repetitive things, but they can’t improve their own efficiency or the quality of their work. Only people can.”[3] As such, Toyota has focused on using materials more efficiently, reengineering cars to make parts lighter and optimize weight distribution for performance and fuel efficiency, and optimizing their assembly process based on the lean concepts we learned in the Toyota case.[4] This has meant that automation is not replacing jobs but instead is enhancing workers’ ability to complete them efficiently.[5] However, I think this could be challenging for Ford to adopt as Toyota’s approach to continual improvement is embedded deep in the cultural fabric of the company; this would not be a change for Ford to undertake lightly.

    [1] Barb Darrow, “The Bright Side of Job-Killing Automation”, Fortune, April 5, 2017, http://fortune.com/2017/04/05/jobs-automation-artificial-intelligence-robotics/, accessed November 2017.
    [2] Mark Muro, “Manufacturing Jobs Aren’t Coming Back,” MIT Technology Review, November 18, 2016, https://www.technologyreview.com/s/602869/manufacturing-jobs-arent-coming-back/, accessed November 2017.
    [3] “At Toyota, The Automation is Human-Powered,” Fast Company, September 5, 2017, https://www.fastcompany.com/40461624/how-toyota-is-putting-humans-first-in-an-era-of-increasing-automation, accessed November 2017. Quote from Wil James, president of Toyota Motor Manufacturing in Kentucky.
    [4] Ibid.
    [5] Ibid.

  4. UserError, you’ve painted a concerning picture for the Ford Motor Company in a post NAFTA world. The plan you outlined for Ford’s efforts to localize the supply chain for the “light truck” segment, sold mostly in the US seems like a sound plan. However, this is only one segment of their market. I’m inclined to believe this strategy will not work for their entire portfolio, because as you mentioned, they have a network of low cost supplier in Mexico.

    For the remainder of their products, I think Ford needs to rethink their strategy in emerging markets. Most recently, Ford, along with their competitor, GM, withdrew from the Indian Market [1]. It’s unclear what drove them to make this decision, but I believe moving forward, as Ford is challenged domestically, they must invest in both a supply chain and customer base in emerging markets such as India and China.

    Sources:

    1.Reuters. (2017, May 18). GM Is Pulling Out of India. Retrieved from Fortune: http://fortune.com/2017/05/18/gm-india-withdrawal/

  5. This was a great article, UserError! This is a topic that I’m extremely interested in as well. You’re absolutely right that there are far-reaching implications of protectionism policy well beyond the basic and intermediary materials the regulations are intended to target. The automotive industry is an especially interesting case study due, not only because pass through pricing could transfer any cost burden to consumers, but also to the rapidity of the industry’s response to threats of regulatory changes, rather than actual changes.

    It’s somewhat unclear from your article, but it reads like Ford has already taken several reactive measures against impending policy changes. I found it especially interesting that Ford has already moved its production centers for certain car models (though iloveTOM insightfully points out that Ford has several other models that are yet unaccounted for) and that Ford is also contemplating additional capital expenditures in what is already a capital-intensive business. This is also all occurring at a time when analysts project plateaued to declining automobile sales in the US [1]. Regarding all this, my question is, to what extent were these operational practices in place or already contemplated and to what extent has the automotive industry being totally reactive? And to that end, what probability of success do they allocate to these regulatory changes? It would seem rather high if these actions are purely reactive and perhaps the broader market should take that seriousness into consideration if that is the case.

    Something that was not mentioned in your article that I thought might be worth contemplating is the role of industry players in determining the policy imposed on them, rather just passively receiving it. In my post on ArcelorMittal and protectionism, I reference a petition by the American Automotive Policy Counsel in which Ford, GM and FCA request the administration moderates its views on broad-stroke tariffs [2]. It seems the collective clout of these and other OEMs can significantly impact the formulation of any new laws and could even negate the requirement for incremental investments.

    [1] Nick Carey, “Fitch sees U.S. auto sales for 2018 at 16.8 mln units”, Reuters, November 29, 2017, https://www.reuters.com/article/usa-autos-forecast/fitch-sees-u-s-auto-sales-for-2018-at-16-8-mln-units-idUSL1N1NZ2LS.

    [2] American Automotive Policy Council, “United States Investigation Under Section 232 of the Trade Expansion Act of 1962 To Determine the Effects on U.S. National Security of Imports of Steel”, https://www.bis.doc.gov/index.php/232-steel-public-comments/1734-american-automotive-policy-council-public-comment/file, accessed November 2017.

  6. Great post! I believe that I’m in agreement with C.S. on this discussion. As is expressed in the Washington Post article below, there are several factors that are in limbo with the current administration, most notably, the corporate tax policies that are currently being discussedin Washington. Trade policies are always evolving, and I worry about Ford making a knee-jerk reaction to any NAFTA changes. Ultimately, I believe Ford’s global supply chain will help them navigate this political uncertainty. As many have mentioned, I believe Ford should be focusing more on the future of demand in emerging markets and how ride-sharing may impact car-ownership in the U.S. than near term trade policy impacts from the current administration.

    [1] Steven Overly, “Why Ford says Donald Trump may be good for the auto industry”, Washington Post, January 10, 2017 https://www.washingtonpost.com/news/innovations/wp/2017/01/10/why-ford-says-donald-trump-may-be-good-for-the-auto-industry/?utm_term=.99e206743cd7

  7. As I contemplated the effects of NAFTA on not only auto-make but also many other companies, I still wonder if this will truly lead to the outcomes we are searching for. Protecting American jobs in this respect and trying to bring back specific manufacturing jobs seems to be a futile effort considering how pervasive automation technology is as others have mentioned.

    Additionally, massive tariffs seem to only erode benefit for all parties involved. As we implement high tariffs, other countries are likely to respond (read retaliate) in a similar fashion. So we bring manufacturing back with a low increase in total jobs, pay more for other goods, and possibly save some money on the goods produced here, all to “protect” ourselves.

Leave a comment