Why Is Ford Motors Increasing Its Investment In Mexico?

Ford Motors‘ (NYSE:F)   recently announced that it is investing $1.6 billion in a new plant in Mexico to produce more small cars. While construction of the new plant is expected to begin in the summer of 2016, production will start from 2018. Ford did not specify the vehicles which will be produced in this plant. Mexico is Ford’s fourth largest vehicle manufacturing site for global customers and the company has been manufacturing vehicles in this region since 1925. Given the lower cost of manufacturing in Mexico, Ford’s investment in a new plant in this country is aimed towards boosting profitability in the small car segment and we believe this is a positive development for its shareholders.

Boosting Small Car Profitability

Cheaper labour costs in Mexico have encouraged several auto makers to expand their production facilities in the region to boost profitability. The country’s international free trade agreements allow for more profitable exports from Mexico to other countries. The Center for Automotive Research estimates that Ford’s Mexico workers earn about $8.25 an hour as wages, compared to the $60 figure for its U.S. workers, making it much cheaper for the company to produce vehicles in Mexico. Small cars are low margin products for auto makers, so shifting production to a low cost region makes commercial sense to boost profitability of this segment. While the company did not provide details of the models it expects to be produced in the new plant, reports suggest that the next generation Ford Focus compact and the Focus based hybrid model will be produced in the Mexico plant.

We expect the gross margin of Ford’s international cars and trucks segment to remain steady around 20% over our forecast period.  We have similar estimates for Ford’s North American car segment.

We expect the company’s One Ford model to reduce costs by standardization to ensure that the margins are maintained.  The recent investment in Mexico is part of the company’s One Ford global product and manufacturing plan and this should contribute positively to its profitable growth in future.

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