Impact of Isolationism on Manufacturing Strategy of Ford Motor Company

The isolationism, particularly the new policies from Trump administration, creates much uncertainty for Ford to plan for its future manufacturing footprints and to decide where to invest now. How should the company balance building a good relationship with administration and making investment decisons that make business sense?

Word count: 794

Ford Motor Company, a global car manufacturer headquartered in Dearborn Michigan, is now facing the challenges of increasing isolationism and potential risk in international trade.

Ford is the second largest US-based automaker with extensive product lines from sedan, SUV, trucks & vans, and commercial vehicles. It is a multinational company with sales coverage, R&D centers, and manufacturing footprints across the world, including North America, Europe, Asia, South America, and Africa. Its supply chain is extremely complicated as the company aims to optimize its profitability by leveraging component supplies and vehicle assembly plant in many different locations.

From business perspective, such decision normally includes following aspects. First is volume. Investing to build a plant or product line in an area demand the sales volume to be large enough to amortize the investment. Second is tax and tariff. The level of tax and tariff, particularly if there is a free trade zone, is a key factor to consider when deciding export versus import. Third is labor and material cost. Dramatic cost differences across countries have resulted in shift of manufacturing from developed to developing countries.

Recent trend in isolationism of international trade will further increase the difficulty of making such decisions, which is further amplified by the long investment horizon of plant or manufacturing line and the uncertainty of the political landscape that might change over time. The uncertainties in trading are happening globally, such as the policy change of new US administration, renegotiation of NAFTA [1], Brexit and the uncertainties of trading environment in EU, and the regulation policy for electric cars in China.

One recent example is that the new Trump administration tries to push for more jobs staying in US. He criticized Ford for investing in Mexican jobs at the expense of American ones and has threatened to increase tariff for car importing from Mexico, which will dramatically change the business equation of where to invest for next plant. Initially, Ford planned to manufacture next generation Focus in a new plant in Mexico. However, in Jan 2017, Ford announced that it would cancel its $1.6 billion investment in this project, which would bring back 700 jobs to US. [2] In Mar 2017, Ford announced a further $1.2 billion investment to build three new plants in Michigan, which would create 130 new jobs. [3] However, in Jun 2017, with its new CEO onboard, Ford announced that it would start importing next generation Focus from China instead of locally producing in US, which would save $1 billion and would be able to spend more money expanding American plants that make high-profit trucks and S.U.V.s. The administration responded by saying that the president wants to create a tax system that encourages companies to bring jobs and factories back here. [4]

The series of actions taken by Ford illustrate the challenges its management is experiencing to predict long-term trend of international trade, to deal with the pressure from current administration, and to make investment decisions that will make business sense in the long run. On the one hand, the company is making effort to communicate and establish good relationship with the government. This is crucial as tariff is not the only leverage that the government has – it might also, for instance, use the regulation of emission as a bargain power to push the company to bring back more investment and jobs in US. On the other hand, given the dramatic hit on business case by pulling its global footprint back to US and given the uncertainty of how fast the new policy will be implemented and how long it will last with current administration, it is a tough investment choice for the company.

I have two further recommendations.

First, Ford should weigh more on long-term strategy instead of reacting to short-term changes. Since it is usually very heavy upfront investments that will impact the operation in the following decades, the company cannot make decisions that don’t make business sense in the long run just to react to current administration, unless the company believes that the mega trend is really going towards that direction.

Second, given the increasing investment in emerging business such as electric vehicle and autonomous driving, Ford can have differentiated strategy when building new plants in different locations. For instance, Ford can keep cost sensitive models in developing countries while setting up new plants in US for electric vehicles or future autonomous vehicles. This will help the company maintain competitive cost structure in related segments, invest in new technology and advanced plants in US, and create new jobs domestically.

One remaining question I have is how should the company work with its suppliers to make sure their footprint strategies are well aligned to achieve synergy across the supply chain in order to better react to the dynamic trading environment at the moment.

 

Reference:

[1] What a Changing NAFTA Could Mean for Doing Business in Mexico, Harvard Business Review, https://hbr.org/2017/06/what-a-changing-nafta-could-mean-for-doing-business-in-mexico

[2] Ford Cancels Plans for New $1.6 Billion Mexico Plant, Bloomberg, https://www.bloomberg.com/news/articles/2017-11-08/apple-is-said-to-ramp-up-work-on-augmented-reality-headset

[3] Ford Investing $1.2 Billion in Plants as Trump Touts Jobs, Bloomberg, https://www.bloomberg.com/news/articles/2017-03-28/ford-investing-in-three-michigan-plants-trump-says-on-twitter

[4] Ford Chooses China, Not Mexico, to Build Its New Focus, New York Times, https://www.nytimes.com/2017/06/20/business/ford-focus-china-production.html

 

Previous:

A Digitally-Enabled Supply Chain in Bloom

Next:

Remove the Friction, Prevent the Fire – Disrupting 3M’s Supply Chain

39 thoughts on “Impact of Isolationism on Manufacturing Strategy of Ford Motor Company

  1. While I agree with your second recommendation, I don’t think that’s what Ford is doing. As you mention, by shifting small-car, efficient vehicle production to China where costs are lower, Ford is freeing up space and investment dollars to build large, inefficient, but (currently) profitable vehicles in the US. Though Americans may be buying fewer compact, efficient vehicles currently, it feels short-sighted for Ford to double-down on producing SUVs and other inefficient vehicles in the US. As macro trends suggest shifts towards electric and autonomous vehicles, will Ford not suffer doubly (financially, and potentially politically) if/when demand for large SUVs drops (and US jobs disappear as a result) at the same time that demand for their efficient vehicles (produced in China, subject to import tariffs) increases (resulting in larger share of production outside of the US)? I’d also be curious to know how Ford is thinking about the political risk that accompanies Chinese manufacturing because while changes to NAFTA may seem more imminent, the current administration’s stance on China isn’t exactly friendly.

  2. I agree with your point that Ford must weigh its long term strategy as it considers how to react to short term stimuli from the Trump Administration and its implications. That said, there are potential risks long-term of the Trump Administration’s actions on our relations with foreign governments that could potentially impact trade even beyond his four year (or eight year…) term. For example, this article in the Washington Post notes that Trump could spark a trade war with countries like China, an implication that does not get immediately resolved once a President leaves office: https://www.washingtonpost.com/business/mr-business-goes-to-washington-now-what/2016/11/12/8c7f7846-a6e2-11e6-ba59-a7d93165c6d4_story.html?utm_term=.3d162359342e. In such a case, Ford may want to consider longer-term implications of the Trump Administration on risks of using foreign manufacturing as part of its supply chain more than you suggest here.

    One additional way the Trump Administration could impact Ford’s supply chain directly is through environmental policy and emissions standards; though Ford may want to consider how it times large capital expenditures in sustainability efforts as a result, it should be careful not to unwind investments it has made or has planned unless it believes the current administration will undo regulation with lasting impact (which I question, given the global emphasis on standards as we saw under Obama).

  3. Thanks for your post, Amanda! I was aware of Trump’s isolationist stance but was unaware of the specific changes that US companies have made to their short-term and long-term strategies to hedge against Trump’s potential policies. I was initially surprised and impressed that Ford reacted so quickly to the changing political landscape – Ford cancelled its investment in Mexico in January 2017 and decided to instead invest in Michigan in March 2017. That’s a fast turnaround time for such a large, global company to change its strategy, especially a strategy that will impact its business in the long-run. However, I was confused when Ford seemed to backtrack on its US-focus in June 2017 (only 3 months later) by deciding to import cars from China. Given that a new CEO took over and the substantial $1B in cost savings, I understand why Ford’s focus shifted, but I think that management should have waited to formulate a cohesive long-term strategy instead of altering its plan every few months.

    Regarding your question about how Ford should interact with its suppliers, I think Ford needs to consider the broad effects of its decision to switch Ford Focus manufacturing from Michigan to China. The New York Times article that I pasted below cites that 46% of the parts for the Ford Focus are produced in the US and Canada. If manufacturing moves to China, these US suppliers could lose business and consequently reduce their workforce. Ultimately, the decisions that Ford makes impact a broad range of players in its supply chain.

    https://www.nytimes.com/2017/06/20/business/ford-focus-china-production.html

  4. The Center of Automotive Research concludes that “any move by the United States to withdraw from NAFTA or to otherwise restrict automotive vehicle parts and components trade within North America will result in higher costs to producers, lower returns for investors, fewer choices for consumers, and a less competitive U.S. automotive and supplier industry”[1]. Broadly speaking, free trade agreements should be beneficial to all parties involved since it promotes countries to recognize and maximize their competitive advantage, where the market allocates industries across countries in order to take advantage the resources each country brings. As a result, companies benefit from lower costs of production, which could trickle down to customers in the form of lower prices. Yes, jobs may be lost in a specific industry, however “for each of those jobs lost, the economy gains roughly $450,000 in the form of higher productivity and lower consumer prices”[2].

    I agree wholeheartedly that Ford should focus on the long-term instead of short-term gains, yet Ford’s latest move is understandable because any large investment in new factories at this point (in mexico or USA) is inherently very risky due to uncertain near-future trade policies. As such, Ford’s decision to maximize profits on its existing factories is a ‘wait-and-see’ move until the long-term feasibility of a new investment is certain.

    Sources:
    [1] https://www.forbes.com/sites/joannmuller/2017/01/20/how-trumps-protectionism-would-destroy-auto-industry-jobs-not-create-them/#10e4b2709b32
    [2] https://www.cfr.org/backgrounder/naftas-economic-impact

  5. Very interesting post. Thanks Amanda! In addition to your thoughtful commentary, I also think it’s relevant to consider the increasing level of automation in US manufacturing plants. As NY Times article ‘How to Make America’s Robots Great Again’ (https://www.nytimes.com/2017/01/25/technology/personaltech/how-to-make-americas-robots-great-again.html) highlights, the reality is that new factories in the US does not necessarily equate many new jobs. Instead, companies are more likely to invest in robots (many of which are manufactured in e.g. China). As you point out, a $1.2bn investment to build three new plants in Michigan only creates 130 new jobs. In this context, could there be a middle-of-the-road solution for Ford to satisfy both the current administration and achieve an attractive ROI? For example, could one feasible solution be to build plants wherever it’s most cost efficient, and re-invest parts of the incremental savings into US robotics innovation (as Ford will ultimately also benefit from more efficient robots)?

  6. Thank you, Amanda! There are not many essays from our section talking about the isolationism, but your essay is definitely an interesting read, especially given your input from an ex-Ford employee’s perspective! There are some data points in your article I found quite interesting, for instance, the canceling of $1.6Bn investment in Mexico and bringing back the Focus factory to the U.S. only created “700” jobs; also another $1.2Bn investment would create “130” jobs. This means roughly every new job created by Ford in the auto industry int he U.S. will roughly require $3.4 million investment? This seems not a very effective way of creating more jobs. That being said, the future GDP and local tax generated by the new factories of Ford could potentially benefit the local economy in the long term. In addition, is there any difference between the tariff of auto parts and finished vehicles, i.e. if it makes more sense to just have the assembly lines in the U.S. or manufacture everything in the U.S.?

  7. Thanks for the insightful article, particularly on a topic that’s current and constantly evolving. It seems to me that although Trump has promised many things including tax cuts, changes to the tariff, and rollback of strict mileage standards, he has yet to have made any real impact in his first year. For instance, I saw this article below recently on latest proposals by the Trump administration on changes to NAFTA. Part of the proposal relates to increasing the percentage of a vehicle’s value that must come from the domestic region, from the current 62.5% (already highest among any global trade bloc) to something higher. While this alone would be difficult to enact (and has had lots of pushback from auto industry execs and trade groups), Trump also wants to at the same time “modernize” the parts list that counts towards the 62.5% threshold. This means adding more content requirements to the parts list to make auto manufacturers source more parts from North America or pay tariffs on them. These are only a couple points in his NAFTA proposals, which he aims to complete in early 2018 ahead of Mexican and US elections in 2018. However, like many of his other proposals, I think he is focusing on too many things at once here and I don’t see a path forward given the cost implications and disruption to an already complex supply chain. I agree that Ford should think longer term, but with so much uncertainty and gap between what Trump says he wants and what he has achieved, I think it will be difficult to mitigate against supply chain risks going forward.

    Source:
    https://www.cnbc.com/2017/08/14/trumps-nafta-autos-goals-to-collide-with-industry-as-talks-start.html

  8. Great article, Amanda! I can completely empathize with companies, such as Ford, struggling to keep up with political pressures to produce locally, while keeping costs to a minimum.

    First, I feel that restrictions on manufacturing locations might make many of these companies cost incompetent in several high volume, low value geographies in Asia. As a result, these companies might have to move away from the legacy model of having large manufacturing hubs to small local manufacturing plants for local demand, say in each country.

    Second, the governments will need to ensure a level playing field for local and foreign players. Otherwise, Ford and similar local companies might find themselves losing on the cost front to Japanese and German car makers.

  9. Amanda, thanks so much for this great discussion on isolationism in the context of Ford. It has been interesting to read your perspective in combination with Ben’s post on this issue. Both of you hit on a common theme which is how to manage the tension between short-term and long-term strategy. I think our conversation from the Fuyao case is especially relevant and informative here. Ford is making 2 major assumptions by deciding to move to China, 1) that the probability of changes to NAFTA are greater than the probability of changes to trade relations with China and that the NAFTA changes would be more detrimental to Ford’s business, and 2) that the favorable manufacturing environment in China, compared to the US or Mexico, will persist. Yet, as we see from our Fuyao case and other sources (https://www.cnbc.com/2017/02/27/chinese-wages-rise-made-in-china-isnt-so-cheap-anymore.html), manufacturing wages in China are on the rise. Additionally, the US-China trade deficit has attracted significant rhetoric from Washington, suggesting that the assumptions behind Ford’s calculations may be incorrect.

    Sushant offers a great solution to diversify risk. I agree that Ford should entertain a smaller scale, local manufacturing approach across multiple countries, as appropriate based on market demand. This in turn could mitigate political risk, achieve economies of scale, give access to new markets, and increase Ford’s leverage in conversations with Washington.

  10. Detroit auto makers have a history of butting heads with the administration. They are some of the largest and most economically influential companies in the US and as such, have frequently been at odds with the government. During the Obama presidency when Chrysler went bankrupt, a group of Chrysler lenders refused to accept the governments bailout terms, claiming that the deal was downright unfair and they were not being compensated enough. Ultimately, after Obama repeatedly bashed the lenders publicly for refusing to make sacrifices when everyone else was, the lenders relented and accepted the governments terms. Ford is facing a similar situation here as it is in their best interest to remain on good terms with the President. It will be interesting to see how Ford’s relationship with Trump evolves as he threatens to pass more and more isolationist trade laws that will severely inhibit Ford’s supply chain. While they will want to appease the government, they also have shareholders to answer to who won’t be pleased with decreased profitability.

  11. Some have stated that it does not make as much sense to focus on Trump’s short term view and other’s have stated that his short term policies in fact have long term implications. I tend to agree with the first camp as Ford cannot predict what the following Presidents will do and these factory investments are several decade investments. A way to hedge themselves is to have plants in the US and elsewhere so that if there is an isolationism battle they are in both countries already. There are risk to any of the plans, but given the global economy we are in from a supply chain perspective, think it is unlikely isolationism wins out.

  12. Amanda’s very interesting article and the comments posted caused me to reflect on how companies should respond to political pressure like that which Ford received from Trump. As Amanda points out, the economic realities of producing in the US are not optimal from a long-term business perspective. Moreover, like Bill, I was very struck by the economics of job creation here – $3M+ investment per job is a much higher number than I would have anticipated!

    There is a huge difference between companies responding to actual political policy changes (e.g., threats of changes to NAFTA or China trade war) versus just words from politician (e.g., Trump’s tweets). By moving its production back to China, Ford could be setting a precedent for limiting the impact of politicians on the strategy of specific businesses. As the Washington Post points out, it is generally the role of government to influence the conditions businesses operate in to encourage local production, rather than interfering in specific business decisions as occurred in this case [1].

    [1] https://www.washingtonpost.com/opinions/fords-shift-to-china-offers-the-trump-administration-a-lesson-in-economics/2017/06/27/ae5f2ea6-5b51-11e7-9b7d-14576dc0f39d_story.html?utm_term=.b6726ef1771e

  13. Thanks for the great post Amanda! I fully agree that Ford should focus on a long-term strategy rather than reacting to immediate, short-term changes in policy. It was rather surprising that Ford cancelled its $1.6 billion Mexico investment and invested an additional $1.2 billion for domestic factories in order to create 830 jobs. That’s over $3 million investments per job! This reaction to the administration’s isolationist push was especially surprising for two reasons – Ford’s willingness to relocate investments from Mexico to the US given significant cost inefficiencies in doing so, as well as the fast speed at which Ford responded.

    On the flip side, it’s great to see the new CEO relocating Focus manufacturing to China while expanding domestic manufacturing for high-profit trucks and SUVs. This is a smart move that allows Ford to address the current administration’s domestic manufacturing concerns as well as improve shareholder value.

  14. Thanks for covering the Trump administration’s desire to shake-up NAFTA and how it may affect Ford, one of America’s most respected manufacturers. One of the challenges behind the notion that companies will adhere to US-specific content and origin requirements is that smaller and medium-sized suppliers to the auto companies may not be able to remain compliant (https://www.reuters.com/article/us-trade-nafta-autos/auto-groups-side-with-canada-mexico-on-nafta-origin-rules-idUSKCN1AX2R9). This could be due a lack of competencies or just due to the cost-prohibitive nature of production in the US for certain components.

    Another consideration for the US auto industry is the reaction that foreign countries will have to the US’ protectionist policies. Today ~2 million cars made in the US are sold abroad, out of a total production capacity in the US of 12.2 million (https://www.uschamber.com/above-the-fold/offshoring-american-jobs-the-risk-posed-tighter-rules-origin-nafta). With the increasing wealth creation in developing markets it seems unclear how US car makers would benefit from the US government ruffling feathers of governments where they export. A long-term view is required in order for Ford and other US auto companies to succeed, and emerging markets will likely play a prominent role in future revenue growth.

  15. Thank you for this interesting article! As I read, I found myself wondering if a “made in America” label actually increases a customer’s willingness to pay. If so, perhaps the higher onshore costs could be justified. However, it seems this is not the case. A recent poll found that only 31% of respondents felt that US-made cars were the best in the world, and that 37% of respondents would flat-out refuse to pay a premium for domestically produced goods [1]. Even if Ford experienced a boost to brand equity, they would need to see a concurrent (and activated) increase to WTP.

    [1] https://www.reuters.com/article/us-usa-buyamerican-poll/americans-want-u-s-goods-but-not-willing-to-pay-more-reuters-ipsos-poll-idUSKBN1A3210

  16. Interesting topic and article Amanda. I agree that it can be difficult to predict how the isolationist pendulum will swing from administration to administration. It’s even been interesting to note how republicans used to be the champions of free trade with Obama being against it during his campaign but then for it when he supported the PTP. Hilary Clinton followed Obama in supporting free trade as Secretary of State but then joined Bernie Sanders and Donald Trump in bashing it. Both parties now seem to be opposed to free trade (unfortunately). However, this anti-free trade movement seems more like populist rhetoric than actual beliefs of many politicians.

    Academics and research still generally support free trade and it is hard to imagine that changing. As a result, I see this isolationism as a populist fad and less of a long-term trend. I think Ford should be cautious but bet on manufacturing in places that help it be cost competitive. Others suggestions of continuing to have a breadth of manufacturing locations is a solid hedge against isolationism, but spreading themselves too thin can cause problems from a cost efficiency standpoint should isolationism turn out to be more rhetoric than substance.

  17. Great read on the effects of governments on manufacturing, and how companies can address regulatory changes term-by-term. The tricky part about tariffs is that they are intended to have significant impact on supply chain decisions and sourcing, but four years later a new administration can incentivize in the opposite direction. Therefore, it is crucial for Ford (and other companies like Ford) to keep their business objectives clear and focus on what makes sense for them, and what they believe the future is going to look like. I agree with your first recommendation on focusing on long-term versus short-term, but I also wonder if US manufacturing is becoming more competitive as it seeks to reduce its own costs and moves towards digitization. As these trends advance and manufacturing processes become more automated, is there potentially a future where such a large discrepancy in costs does no longer exist?

  18. I agree that Ford should take a long-term view when deciding whether and where to build new plants, given these are multi-decade decisions. However, it is extremely difficult for them to predict where politics and regulations will end up in the future – their guess is as good as yours or mine. Who knows if the isolationism sentiment that has been sweeping the world is here to stay? As a result, I wonder if the company can attempt to hedge their bets on plants, potentially through the following ways: (1) having a flexible factory layout and manufacturing process, such that the plant can be easily retooled at low cost to produce different types of vehicles; (2) building a plant that can be easily sold at a satisfactory price, if it proves to be unviable due to the changes in politics and regulations. These ‘hedges’ will reduce the volatility to company performance in times of changing political environments, and will reduce the cost to the company in the worst-case scenario, even though it may cost a little more right now.

  19. Another consideration for Ford in keeping plants in the US is exploring what the Trump administration is willing to offer to keep jobs here. For example, Carrier received significant tax breaks ($7M) just for keeping 1,000 jobs in Indiana (http://fortune.com/2016/12/02/indiana-carrier-jobs-tax-breaks-mexico/). While this administration has demonstrated a public facing goal of keeping jobs in the US, American producers may also be able to negotiate benefits for keeping jobs here. That being said, as you say, there is also the short term versus long term assessment that needs to be conducted. Any arrangement negotiated with one administration is not guaranteed and Ford could end up with a higher cost structure if they submit to the influence of the Trump administration.

  20. I agree that Ford should not be making short term moves, but in today’s political climate where no one can surely say where our trade policies will be even one year from now, I would argue that they should face this problem head on. Since Ford cannot be cost competitive with manufacturing domestically, free trade and globalization are essential to their future success and the jobs they create in the US. They cannot afford to continue being reactive to today’s isolationist trends.

    In the US, there are few companies that can command as much attention to the topic of ‘jobs’ as Ford can, and they should be using this to their advantage. Rather than trying to work around trade policies, they should focus on educating the public in what new types of jobs they can create in the US with a global manufacturing strategy. The auto industry’s manufacturing jobs from decades ago will not be coming back, so the best thing Ford can do is help accelerate the public’s awareness and understanding of this matter; Ford’s job creation in the US depends on globalization.

    Until companies like Ford fight back, they will be stuck with deciding between high cost domestic manufacturing or potentially high import tariffs and the bad press associated with ‘moving jobs overseas.’ Until reading your paper, I had not even heard that Ford’s excuse for moving the Focus plant to China was that they would be using those savings to invest in SUVs in the US. That part of the story barely made the New York Times article on this back in June! (https://www.nytimes.com/2017/06/20/business/ford-focus-china-production.html)

  21. Thanks for your article, Amanda! Agreed that it is a tough road ahead for Ford – yet, also one that has great potential. Increased pressures due to isolationism and broader innovation in transportation force Ford to think more seriously about how they fit into the mobility space in the long-run. Massive shifts in the way we interact with Ford as a brand are in store as we see macro trends come to fruition such as the emergence of driverless cars, declining car ownership, restructuring of city streets, and increased electric vehicle production. In order to understand how Ford should invest in its domestic operations, it must first understand what type of company it may evolve to be.

    In order to explore this predicament, Ford has formed an interesting partnership with IDEO to reframe its position within the future of mobility [1]. I am curious to see how they balance this long-term planning and strategic thinking about their value proposition with near-term pressures to protect against the economic and supply chain strains imposed by isolationist policies.

    [1] https://www.ideo.com/case-study/beyond-cars-designing-smarter-mobility

  22. I love the points suggested in the comments above around Ford potentially using its business strategy to influence government and be a leader, rather than being reactive and letting the current administration dictate where it will and won’t go. I completely agree. However, I do wonder if there is value in this reactive approach that Ford can capitalize on by being flexible and making short term moves that will allow them to ultimately take advantage of any incentives the current administration is offering them.

  23. Amanda’s analysis/recommendation that Ford not make long-lasting decisions with an eye toward the current administration cuts to the heart of a very serious question in the auto industry. Automakers, as Charlie Weinberg noted above, have a long history of being at odds with the government. This time, though, the tables have turned. Typically, the government is pushing for more safety features, better efficiency, and fleet-wide emissions reductions. Yet here we find an administration that cares about employment and on-shoring manufacturing more than about long term impacts on the environment or the industry landscape. For once, an automaker is facing pressure that seems more likely to relent in 4-8 years than to continue. The question for Ford now is whether they can weather the isolationist storm for the balance of this administration. As it looks now, Ford should take Amanda’s advice and stand their ground with a wise and prudent long-term view. It seems ever more likely that the administration may not last as long as a 3-year/36,000 mile lease with no money down for qualified lessees.

  24. I agree that Ford should take a long-term perspective, and not react to some of the rhetoric coming out of the current administration around potential isolationist policies. It is also surprising to me that Trump and isolationism has been credited with pressuring Ford to create jobs in the U.S. In reality, Ford’s announcement of the new plant in Detroit was the result of forces that were in place long before the current administration. It seems that Ford has been investing for a while in manufacturing it’s larger car models here in the States, and this move was a continued part of that strategy. [1]

    I’d also be curious to get your perspective on the risks involved with investing in electric and autonomous vehicles for the company. While I agree it’s probably the right idea to think ahead about some of these forward-looking trends, there may be some downside to blindly investing in these waves without careful consideration around Ford’s competitive advantage relative to other firms that are moving this way.

    [1] http://www.slate.com/articles/business/the_juice/2017/01/ford_isn_t_adding_u_s_jobs_because_of_donald_trump.html

  25. Great read. I agree with you and hope that Ford doesn’t make too many decisions based on a short term term view since administrations are fluid and they are not in a position to make useful guesses on the future political climate. That said I think they should probably do what they can to mitigate risk by building plants that can be readily switched for another use.

  26. Fascinating article and great analysis! I agree that Ford, and all motor companies, need to keep a long-term lens when making such capital intensive investments as manufacturing plants. The short-term generation of 130 jobs for a $1.2 Billion investment does not seem like a great tradeoff unless Ford is gaining significant advantages by having those three new plants in the US.

    However, I do see the long-term negative impacts this administration could exact upon the auto industry that would have implications long after the administration is out of power. One of these could be the major changes to NAFTA being discussed. I wonder if companies like Ford should make the short-term capital investments now to appease the administration in order to ensure that NAFTA remains in place. However, they should combine this with the lobbying against changes to NAFTA as they have been doing even recently [1].

    [1] http://money.cnn.com/2017/11/28/news/economy/trump-car-companies-nafta/index.html

  27. I broadly agree that automakers such as Ford should maintain a long-term view on the likely benefits of their capital investments; particularly in the present moment where isolationist sentiment feels more like a passing trend than a major shift in policy consensus. It is entirely likely, in my view, that a new cross-border investment today with a 10+ year time horizon will experience relatively few negative effects from the current US administration’s posturing on cross-border tariffs.

    In response to the question on how the company should work with its suppliers to make sure their footprint strategies are well aligned – in my view, Ford should cultivate supply options from a diverse source of low-cost geographies to mitigate economic and socio-political risk. Because of rapidly changing political dynamics it is almost impossible to “plan away” all negative effects of movements such as isolationism. However, a diverse supply base will allow for more flexibility to respond well to isolated political events that arise. If any of the company’s supply chains are overly concentrated with a single supplier that is based in a single location, they should actively work to cultivate alternative suppliers in different geographies.

  28. Amanda, thanks for highlighting the impact of isolationism on Ford! In addition to the manufacturing challenges that are discussed in your article and many of the existing comments, I think it’s interesting to think about the final step of Ford’s supply chain – selling to the the end consumer.

    Ford, among many other major car manufacturers, are having difficulty remaining competitive in certain international markets. For example, Ford pulled out of the Japanese market last year. While it’s true that trade and protectionist policies had an impact on Ford’s ability to compete with domestic auto makers in Japan, the article below emphasizes that isolationism is not the sole reason.

    Foreign auto makers, including Ford, have been unable to adapt to differences in Japanese customer preferences related to cars. In Japan, the purchasing process is extremely service-orientated. It is not uncommon for a salesperson to come to a customer’s home to test drive potential cars. Furthermore, Japanese car owners expect more free services from their dealer. Domestic dealers will often pick up and return a car to its owner when service is necessary.

    Therefore, as Ford continues to reflect on how isolationism is impacting the various areas of its supply chain, it’s important for the firm to still keep cultural differences in mind for both manufacturing and selling in various global markets.

    Source: The Atlantic, “Why Aren’t U.S. Cars Popular in Japan?” https://www.theatlantic.com/business/archive/2017/11/us-cars-japan/544991/

  29. Thank you, Amanda, for this great article – a prime example of the trade-offs between globalization and isolationism that many countries are facing today.
    With regards to Ford, how do you see these isolationist approaches affecting other parts of their supply chain? Apart from manufacturing and factory-related decisions, what is the effect as you move up and down the supply chain?
    While reading your analysis, a broad (maybe a bit philosophical) question came to mind: If one takes a utilitarian view, would globalization or isolationism prove more effective for the overall industry? Arguably, providing incentives for giants like Ford to build factories in the US pushes them for more innovation and effectiveness in their operations. This can have significant positive effects on the industry as a whole, since production processes become more optimized.

  30. Amanda, thank you for an interesting article, and I strongly agree with both of your recommendations.
    Reading your article, it made me wonder how other automobile companies are battling President Trump’s pressure, and came across an interesting article about a new Toyota and Mazda alliance deciding to build an assembly plant in the US by 2021 for $1.6 billion. [1] Like Ford, Toyota dealt with Trump’s strong criticism earlier this year when they announced that they were planning to assemble the Corollas at a $1 billion plant that was already under construction in Mexico. And what Toyota announced in the summer was this construction of a new plant in the US.
    As some people have mentioned in their comments, one way to deal with uncertainty is to diversify into other countries. But another way is to de-risk through partnership, which is what these two players did. As you have mentioned, we do not know what the future beholds, but what is certain in this Toyota and Mazda alliance is that Mazda does not have a production plant in the US. So for Mazda, there is an incentive for them to diversify their production into the US, especially considering a situation when new policies do arise. But if the new policies do not happen and nothing changes, as you have mentioned for your second recommendation, the alliance can change their plans by leveraging the high-skilled labor in the US, making the new plant a central location for electric vehicles and autonomous vehicles.

    [1] https://www.usatoday.com/story/money/cars/2017/08/04/toyota-corolla-mazda-mexico/539179001/

  31. Thanks for this article, Amanda, enjoyed reading it. I agree with your recommendation that Ford should take a long-term view in selecting where to deploy its capital geographically. As you correctly state, expected market demand / volume should be the principal consideration in choosing where to install supply, as opposed to regulation that might go or not go through and is always dependent on the current political climate, intrinsically temporary and unpredictable. I wonder if another way of dealing with Trump’s criticism might be spreading out the manufacturing over many different countries, much like the ‘borderless manufacturing’ concept we have seen in the Li & Fung TOM case. This way, Ford might be able to both profit from lower wages for the labor intensive part of car manufacturing (e.g., plating or seat and electronics manufacturing), whilst leveraging the technological edge in the US for highly automated assembly. As a result, cars are technically still being manufactured in the US and Trump’s criticism, including the threat of high import tax rates for foreign cars (which may well be up to 35%) [1]

    [1] ‘Trump threatens German carmakers with 35 percent U.S. import tariff’, Reuters, https://www.reuters.com/article/us-usa-trump-germany-autos/trump-threatens-german-carmakers-with-35-percent-u-s-import-tariff-idUSKBN1500VJ, accessed December 1, 2017

  32. Thanks for the interesting read, Amanda. I agree with the points made that it is difficult to draw the line between sacrificing short-term for long-term gains and vice versa, given that the political environment may swing either way and we’ve seen some radical shifts in strategy over the past year. It is interesting that other manufacturers like GM have also sided with Trump [1] to invest $1B in new US manufacturing plants to create 1,500 jobs this year and additional 5,000 in the near term. Despite claims from both managements that decisions for these projects were made prior to elections, it is clear that there is an element of pressure and I’m curious to see whether a reversion will occur if sentiment in the White House changes.

    [1] https://www.nbcnews.com/business/autos/gm-s-1b-investment-not-driven-trump-likely-dates-back-n707661

  33. Great article Amanda. I think a focus on the long term business horizon is important now more than ever. Even a quick back of the envelop calculation comparing the two factory examples you highlighted – the closure of a $1.6B plant with 700 jobs and the opening of a $1.2B plant with 130 jobs – clearly show the short term costs of these protectionist measures. Ultimately this will serve to undermine the competitiveness of American companies such as Ford, as foreign competitors are able to take advantage of more liberal trade agreements providing them access to affordable capital and labor.

    Protectionist measures can be meaningfully productive if they support innovation (e.g. tax breaks for start-ups, research and innovation grants, global patent protections) though this does not appear to be the intent of the recent growth in protectionist policy. Without a focus on new growth opportunities, protectionism is ultimately value destroying for all parties.

  34. Thanks for the interesting read, Amanda. I agree with the points made that it is difficult to draw the line between sacrificing short-term for long-term gains and vice versa, given that the political environment is volatile. It is interesting that other manufacturers like GM have also sided with Trump to invest $1B in new US manufacturing plants and to create up to 5,000 new jobs in the near future. Despite claiming that these decisions were made prior to the new president taking office, I’m sceptical toward management incentives in this case as the tax benefits and subsidies offered to GM and Ford are likely offsetting part of the incremental cost of manufacturing in the US versus in low-cost countries in the short-run. Over time, as the subsidies are eliminated, the company will bear the burden of a high-cost asset base. I wonder how alogned management incentives are, given that the useful like of these plants is longer than the average CEO tenure.

  35. I completely agree with Amanda and other commenters here that Ford should ignore the short-term implications of the Trump administration’s stances. Not only will these pressures likely reverse themselves over the next 4-8 years, as TJ indicated, but also it’s unclear whether the Trump administration’s claims are anything more than bluster. Thus far, the administration has not fulfilled any of its protectionist and isolationist threats. For example, neither the promise of 35% tariffs on companies relocating to Mexico nor that of 45% tariffs on goods from China have been implemented [1] and, given the number of other items on Trump’s agenda, it seems unlikely that they will come to fruition any time soon. Ultimately, a corporation’s capital investments should rely on a relatively long-term view of the world and, given the widespread analyses indicating how detrimental isolationism is to both the US and world economies [2], it seems like Trump’s protectionist agenda will be ephemeral at best — and, more likely, not existent in the first place.

    [1] https://www.economist.com/news/special-report/21729868-does-american-presidents-protectionism-pose-threat-emerging
    [2] http://time.com/4396708/donald-trump-protectionism-world-economy-lagarde/

  36. Thank you for the great analysis, Amanda! I also agree with your point that Ford should focus on long-term strategy to avoid being influenced by short-term agendas of alternating administrations. In this context, it’s interesting to see how Ford appears to have succumbed to the Trump administration in cancelling its Mexico factory development on the one hand, but on the other has taken a strong stance against the administration in matters related to climate change [1]. As you alluded to this might suggest that Ford views the need for domestic manufacturing as driven by a broader public trend.

    [1] https://www.theguardian.com/environment/2017/dec/01/trump-climate-change-paris-withdrawal-ford-walmart

  37. Thanks Amanda. You tried to tackle a hard question regarding the cost benefit of doing production overseas, versus the job creation benefit of housing those operations in the US. While you outlined the problems, I’d be curious to hear your recommendation on Fords elected location. You mentioned they should place more weight on the long-term strategy instead of short-term changes since these are capital intense projects that will weigh heavily on their operational decisions for years to come. Does this mean that you’re suggesting they should go overseas? What type of tax benefit would they require in order to reconsider locating the plant here, and are they working with the current administration to accomplish this?

    Unfortunately I believe Ford’s decision to offshore has a bigger implication on the American perception of health than other companies – simply due to the brand equity it carries in the US. Yet basing decisions off of the current administration is risky given the lack of enforcement on tax promises thus far. I would recommend that Ford operate under the assumption that the current situation will not become less risky/more appealing in the short-term.

  38. Thanks for a great read, Amanda. Couple thoughts:

    1) The cost-benefit analysis of moving operations offshore is tricky since it is extremely difficult to predict the impact moving your operations offshore would have on demand given the negative perception it could bring with it.
    2) I like your suggestion about diversifying their asset base. In the long-run, I’m of the view that isolationism can not be the winner. Given that, Ford should do the bare minimum it needs to protect its brand and avoid negative public perception while doing all it can to optimize on costs.

  39. Great topic and analysis, thanks Amenda. I agree with both of your recommendations in terms of focusing on long term when making manufacturing sourcing/ investment decisions and separating operations based on asset type. The hard question is how to better predict future policy trends and make decisions minimizing adverse impacts on the short run while exchanging for long-term benefits. Just to add another perspective to the list above, personally I feel isolationism will also move relative powers among different countries around the globe, and it might be helpful to assess how the dynamics in relative power positions may change as a result of isolationisms, in an attempt of predicting long-term policy trends while making basing decisions of global manufacturing.

Leave a comment