Trumps Auto Bluster - WSJ Editorial
Does Donald Trump understand business? Real estate, no doubt, and branding, sure. But the President-elect’s Twitter assaults on auto companies make us wonder if he understands cross-border supply chains, relative business costs, regulatory mandates, or anything else about building and selling modern cars and trucks.
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In November, the day after Mr. Trump won election, GM said it will lay off 1,250 employees at a Lordstown, Ohio, factory where the Cruze sedan is manufactured. U.S. deliveries of the Cruze declined 16.6% last year amid a broader consumer shift driven by lower gas prices to buying trucks rather than small passenger cars. Trucks and SUVs made up 60% of U.S. vehicle sales last year, up four percentage points from 2015. As Glenn Johnson, the local United Auto Workers president in Lordstown, explained, “It’s supply and demand, and right now the demand is not there for what we have.”
GM points out that all Chevrolet Cruze sedans sold in the U.S. are still built in Lordstown. In Mexico GM builds Cruze hatchbacks that are mainly sold elsewhere around the world. Only 2% of Cruzes sold in the U.S. last year were assembled in Mexico.
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Some brave soul should also tell Mr. Trump that auto makers have moved production in Mexico because of its free-trade deals that provide better access to global markets. Mexico has 10 trade deals with 45 countries including the European Union and Brazil, which make up half of the global car market. The U.S. has 14 agreements with a mere 20 countries. Nearly 15% of the cars produced in Mexico are destined for Europe and Latin America, where they often face lower tariffs than do cars exported from the U.S. Lower tariffs on exports exceed labor savings on Mexican-made cars by four times.
Yet even with all of these cost advantages, only 18% of U.S. auto makers’ North American vehicle production is in Mexico. U.S. companies continue to make most of their higher-margin trucks and SUVs in the U.S. as labor is a smaller share of the gross margins and production costs for large vehicles. Manufacturing heavier vehicles near their main market also cuts transportation costs.
Meanwhile, Mr. Trump also took credit for Ford Motor’s announcement on Tuesday to invest $700 million in electric and self-driving cars in Flat Rock, Michigan, while calling off plans to build a $1.6 billion plant in Mexico to make its Focus compact. Close inspection suggests that Ford is attempting to mask business necessity as Trumpian political virtue.
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Yet Ford is still planning to move production of its Focus and other small cars to Mexico. The only change is that the Focus will now be made at an existing plant in Hermosillo, Mexico. U.S. sales of the Focus declined 16.6% last year in line with a 13% reduction in Ford’s small car sales. This has muted the need for additional plant capacity in Mexico. But this is nothing to celebrate: A fall-off in Mexican production could hurt American auto suppliers that furnish 40% of the parts for cars exported to the U.S.
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Mr. Trump seems to think he can conjure job growth by beating up business. But to the extent he cows CEOs into making non-economic decisions, he’ll be helping their Korean, Japanese and German competitors. Now that he’s about to become President, Mr. Trump will have a tough enough job trying to make America an easier and less costly place to work and invest. He’ll embarrass himself less if he leaves investment decisions to CEOs who understand their businesses.
http://www.wsj.com/articles/trumps-auto-bluster-1483744913
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