Ford Says Goodbye To Mexico, And Hello To China For Small-Car Manufacturing 1

Ford shifts manufacturing of Focus to China

Select global auto manufacturers (CARZ) are shifting base from the west to the east. Most recently, Ford Motors, the second largest auto maker in the world, chose China (FXI) over Mexico (EWW) to build its small-car plant. In January of this year, Ford (F) had cancelled plans to set up a plant in Mexico to build the ‘Focus’, its next generation small car, after President Trump proposed imposing sanctions and tariffs on companies manufacturing in Mexico.

In China, Ford operates through three local Chinese manufacturers – Changan Ford Automobile (CAF), Jiangling Motor Corporation, and Lincoln. Currently, the Focus is manufactured by Changan Ford at two different plants in China.

Joe Hinrichs, head of global operations at Ford believes the company would save $1 billion in expenses by manufacturing in China instead of Mexico. This includes the $500 million in savings announced by the company when it cancelled plans for setting up its Mexico plant. These cost savings will enable Ford to expand its existing American plants that manufacture higher margin trucks and SUVs.

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In recent years, Ford has been under tremendous pressure to trim its expenses in order to fund its investments in electric cars and self-driving vehicles to keep up with its competition. The company recently announced plans to cut $3 billion in annual expenses that would include laying off 1,400 employees.

Ford will begin production of the new Focus in China from the second half of 2019 and most of the new models will be exported globally. Ford’s plan to shift the manufacturing of the Focus from the United States to China is also a signal of sluggish demand for small cars in the former. The emergence of China as a manufacturing hub for auto companies and its status as the world’s largest car market is also attracting large auto makers including General Motors (GM), Volvo (VOLV), Ford (F) and Tesla (TSLA) . Volvo set up manufacturing of its S-90 series in China in November 2016 while General Motors has been making its low-volume Buick Envision midsize SUV in China since 2016. General Motors also builds a small number of its plug-in hybrid electric Cadillac CT6 sedans in China. In 2016, China’s share in global auto production rose to 29.6%, the highest levels since 2008.

Michelle Krebs, senior analyst for AutoTrader recently stated, “Building in China [for export to the U.S. market] will become more common.” He continued, “The small car market has fallen far more than any one anticipated. Ford needed to find a low-cost way to produce them. They’re already making the Focus in China. This just made sense.”

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