Why Ford Canceled Its Mexico Production Expansion Plans
Ford Motor Company (NYSE: F) recently announced that it is cancelling its plants to invest $1.6 billion in a manufacturing facility in Mexico and will instead invest $ 700 million to expand its plant in Flat Rock, Michigan. Although, the company says that this is purely a business decision, the press is rife with speculation that the auto maker’s hand was forced by the potential changes to trade agreements between Mexico and the United States under the new Donald Trump administration.
Still, there appears to be some business logic to the decision made by the company. Ford currently operates three facilities in Mexico: Chihuahua, where it makes engines; Cuautitlán-Izcalli assembly plant for Ford Focus; and Hermosillo assembly plant for Ford Fusion and Lincoln MKZ. Ford manufactures the sports car Mustang and the luxury SUV Lincoln Continental in its Flat Rock plant. According to the company, instead of expanding production in Mexico, it will instead produce a hybrid version of the Mustang at Flat Rock, which will enter production by 2020, and an autonomous electric vehicle, which will enter production by 2021, for ride sharing services.
One potential motivation for scrapping the plan to expand production in Mexico could be the poor performance of passenger vehicles in the U.S. over the last two years. Sales of the three sedans that Ford produces in Mexico have declined by a combined 12.7% in 2016 compared to 2015 sales.
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Moreover the entire passenger car market seems to be declining. This is further compounded by the fact that SUVs and Crossovers seem to be the new consumer favorites. One reason for the increase in sales in these segments was the low fuel prices over the past 18 months. However, with oil prices on the rise again, fuel economy will return to the forefront of the agendas for auto manufactures once again. Combined with the impact of dropping lithium-ion battery prices, increasing ranges of electric vehicles, the acceleration of autonomous vehicle technologies and the impact of ride sharing services like Uber on consumer behavior, the need to catch up on alternative fuel technologies is greater than ever.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Ford Motor
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