Ford CEO Mark Fields angered some politicians when he recently announced the company would be moving all small car production to Mexico. But companies don’t typically take such major steps lightly. Government policies—and the threat of even more draconian policies—usually drive their decisions.
Let’s take a look at some of them.
CAFE standards. For decades, the U.S. automobile manufactures’ profit sweet spot has been in trucks and SUVs—because those are what customers want, especially when gasoline is cheap.
According to the Wall Street Journal’s Market Data Center year to date, 4.9 million cars have been sold. And that number includes the luxury cars that can still be pretty profitable for the companies.
By contrast, 6.8 million light-duty trucks and 4.4 million SUVs have been sold, for a total 11.2 million—well over twice the number of car sales.
So why don’t the manufacturers scrap most of the small car production and just build something profitable and that consumers want? The Corporate Average Fuel Economy (CAFE) standards.
The CAFE standards, which began in 1975, require auto manufacturers to meet government-imposed fuel economy standards across a fleet of cars. In order to meet those standards, which have been dramatically increased under President Obama, car makers have to make light, inexpensive cars with high fuel economy to offset their trucks and SUVs with lower fuel economy. And electric cars really help their fuel economy balance.
So the companies make minimally or even unprofitable small cars and electric vehicles so they can sell their popular and profitable large products—and hope for a profit in the end.
By moving their small cars to Mexico, which has skilled but cheaper labor, Ford hopes to break even or make a little profit off of them.
The Obama administration has no problem with for-profit companies losing money—just check with the major health insurers—but companies do. And if they have to make small cars, and they do, no one should blame them for trying to eek out a profit from them.
Tax policy. The U.S. has a 35 percent corporate income tax rate, and when state taxes are included, it’s 40 percent. Mexico has a 30 percent corporate rate. If the Mexican government is tossing in some tax sweeteners, the effective tax rate could be very favorable when compared to the U.S.—and could turn an unprofitable car line into a profitable one.
House Speaker Paul Ryan and many Republicans have been pushing tax reform for years in an effort to make it attractive for companies to start up, stay in or move to the U.S. Those calls have fallen on deaf ears in the Obama administration—unless Republicans were willing to ensure reform meant more revenue for the government.
Fix the corporate tax system—and Donald Trump’s plan would do that — and the U.S. would become a magnet for corporate investment.
Fossil fuel fanatics. The environmentalists are looking for new targets in their insane efforts to shutter the fossil fuel industry. And the Democratic platform indicates it’s on board with whatever it takes.
If you’re a company that makes a fossil-fuel using product, you have to be concerned that the greenies will soon be coming after you. Remember, Hillary Clinton has said she wants to move away from all fossil fuels.
Ford is only moving its small car production to Mexico—for now. Fiat Chrysler Automobiles has already announced it will move all production out of the U.S. The company didn’t say it, but U.S. protesters can’t picket what doesn’t exist.
Incidentally, the reason it’s Fiat Chrysler as opposed to Chrysler Fiat—and before that Daimler Chrysler and not Chrysler Daimler—is U.S. tax policy.
Tough-talking politicians. Let’s face it: neither presidential candidate is big on the global economy. Trump responded to the Ford announcement by saying, “We shouldn’t allow it to happen.” Obama has already made several attempts to punish similar decisions.
Political critics claim it’s greedy and unpatriotic to move manufacturing offshore. Actually, it’s rational economic behavior when confronted with politicians who impose onerous mandates and penalties, the highest corporate tax rate in the developed world, and verbal scorn on any company that doesn’t bow to the heavy hand of government.