Sunday, September 8, 2013

The Ford Fusion and how the media got it wrong (again!)

2013 Ford Fusion

I had a pretty intense discussion with a guy from Detroit at a dinner party a couple of years ago.  Okay, so some would say it was more of a debate.  Well, it was an argument.

Anyway, the Detroiter, a visitor to South Florida, was decrying the tendency among the locals to buy foreign cars.  “Why not buy cars made by the Big 3 and create jobs in the U.S.?” he argued.  I might have asserted my preference for the design, features and quality of foreign cars; but I didn’t.  Instead I pointed out that it’s not so easy to figure out what’s a foreign car and what’s a domestic car. 

The Big 3 have focused their investments on foreign markets while manufacturers of “foreign cars” have been investing in factories in the U.S.  Capital investment creates jobs.  So, would you rather buy a Ford Fusion made in Mexico or a Honda Accord made in Ohio?

Well, pretty soon, the question may be moot.  Ford has announced that its Fusion sedan will no longer be made only in Mexico.  They will be expanding their capacity to produce their best selling car in Michigan. 

Ford’s decision is only one example of manufacturers investing and creating jobs in this country.   The media reported this story as though Ford was living up to a promise they had made to the unions to add 12,000 domestic jobs by 2015.  As usual, the media got it wrong.

I’m not saying that Ford didn’t make that promise.  I’m saying other forces drove their decision.  U.S. exports have been growing seven times faster than the economy at large since 2005.  Most of that growth has come at the expense of other large manufacturing economies in Europe and Japan.

To understand this, you need to wrap your head around a new set of economic facts.  By and large, Americans (fed by an uneducated media) focus on jobs and wages. It’s something we can all understand.  But the cost of labor in the economy at large is driven by productivity.  And productivity improves because of automation and labor regulation.  Robots populate automobile assembly plants where workers used to stand.  And, American employers have more flexibility than their European and Japanese counterparts to lay off workers when economic conditions dictate.  In Germany, for example, rules governing notice to workers and requiring severance pay drive costs to shut down a factory.  Lay off 1,000 workers and it may cost you more than $40 Million in severance in addition to mandated worker training and asset write-down rules.

If you are running a global manufacturing company, you have to consider these factors before you invest in a new factory.  So, in a way that some may consider perverse, the absence of those rules in the U.S. is creating more jobs.

A new study by the Boston Consulting Group (BCG) identifies the key drivers of this trend as lower cost of labor (when adjusted for productivity), transportation and electricity.  By their estimates, leading industrial nations – the U.K., Germany, France, Italy and Japan – will have costs ranging from 8 to 18% higher than the U.S. by 2015.  China? Their costs will be lower but the gap is closing.  At 95% of U.S. manufacturing costs, the added transportation cost to get products to our shores erases their advantage completely.

BCG cites some interesting examples of foreign manufacturers investing in plants here so they can export to other countries.  Chinese computer giant Lenovo has opened a plant in North Carolina.  Toyota is exporting Camry’s from Kentucky to China and Russia.  Rolls Royce is making aircraft engine parts in Virginia.  France’s Michelin is building a new factory in South Carolina. 

For sure, there are gaps that need to be addressed.  Technical education is one.  The shortage of degreed engineers and technically qualified factory workers will only grow as time goes on.  Importing engineers from other countries requires reform to our immigration policy.  But, there are ways to address these concerns.

Siemens AG, a German manufacturer of telecommunications equipment, has built a factory in Charlotte, NC.  Their decision to locate there was the result of state and local governments investing in infrastructure and working with local junior colleges to develop programs that will give local workers the skills they need to work in Siemens’ factory. 

Despite the valid complaints of many business people about government regulation, the U.S. still has a high degree of economic freedom.  Capital seeking a high return is coming back to the U.S.  But, the needed reforms to both education and immigration policy are tied to emotional debates between the hard right and the hard left.  A deadlock, as we know, that will not be broken soon. 



  1. Eric Hulbert
    Consumer Prod Strat Analyst at Bank of America

    I find that John's well thought out posts do a good job of fostering constructive dialogue which can lead to shipmates helping each other out thus satisfying the goal of this group.

    In regards to your post, I liked it all except the point about a shortage of engineers. I am not sure I agree with everything in this article, but I think he makes some good points. I was actually recruited to work as an engineer at the Michelin plant you mentioned, but it did not get very far once they mentioned what they were looking to pay. I think the "shortage" of engineers is more a shortage of engineers willing to work for the low wages they are offering. Employers want to be able to import more engineers from places like India and China because they will work for a lower salary and dont leave because they are afraid of having their visas revoked.

  2. @Eric. That's an interesting article. My own perspective is much broader given my age. When I was growing up, being an engineer was seen as a great profession. JFK had called upon the nation to send a man to the moon and return him safely to earth. My uncle, a USAF vet, got his degree in aerospace engineering and worked on the LEM at Grumman.

    At the time, engineering was the place to be.

    But, talent follows money. It's true in professional sports and its true among college grads. While I was bouncing around the Atlantic in the 70s, it was the dawn of the age of the Finance MBA among land lubbers. During the 80s, I was hiring West Point grads to work in call centers because of their leadership skills. I couldn't afford USNA grads. Their shipboard jobs had become more technical than they were in my day and their skills could command higher salaries when they exited the service.

    But, in a free market, demand met by insufficient supply results in higher prices. One can only hope that a resurgent manufacturing sector results in corporations who complain about the lack of engineers will put their money where their mouths are.

  3. Indeed talent does follow money. That is one reason why I am one of those 2/10 STEM grads who do not work in STEM fields. It was not necessarily money that made me choose BofA, but analytics is interesting and should provide me with plenty of other opportunities.

    A better question might be is there a shortage of talented engineers? My wife is a brilliant engineer who has her PE and 8 years of experience. She makes about the same money as her sister who is an underwriter with three years of experience (in underwriting, 6 total years in mortgages). She wonders all the time if it was worth the struggle to get an engineering degree when her sister makes the same money and took the easy road in communications. One of her friends could not cut it in civil engineering, failed the PE exam three times, and now makes more money as an underwriter for Chase. Could it be that the 2/10 who do not work in STEM fields are among the more talented ones?
    By the way, that article was sent to me by a physicist who did the opposite, he left a hedge fund job to seek his PhD, and is now a fellow at Georgetown. This is a passionate subject for him and the other unemployed scientists I played rugby with in Gainesville.

  4. Brent Ditzler
    Supervisor, Export and Powerpack, Powertrain Integration Management at Ford Motor Company

    I am going to the San Antonio SACC to find engineers for Ford Powertrain. The well is Southeast Michigan is dry---a relative shortage.

  5. @Brent. Interesting comment. Please give us a report of your experience there. Will you be relocating them to MI? Will that impede your efforts?

  6. Luis Martínez, SPHR, CCP
    Executive Coach, Leadership Development Coach, Human Resources Consultant. Founder GTEN Executive Network.

    John, excellent observation. Having worked in two manufacturing multinationals, it's amazing how journalists go for the catchy headline, instead of understanding unit manufacturing costs, regulations and logistics which ultimately govern how/where goods will be manufactured - and who/ where their sustainable markets are. But that was too long a headline.

  7. Stephen Komlo
    Sr. Associate at CORTAC Group

    John, Your economic driven comments are correct and the statement of the US having less regulations are true. The uneducated person, due to the lack of media focus, has left our employee pool at the mercy of the union leadership. I had an office in a suburb of Detroit, MI and would engage the automobile "workers" in conversations about quality, design, etc. You were right to avoid that is not going to be solved any sooner then the argument over labor laws. Thanks for you insight and thought provoking blog.

  8. Michael McGrady
    Unemployed at Mica Scientific

    John, your analysis is like a master criminal figuring out how to break into the houses of workers and steal their money, lives, and health. Do you not care about people?. This analysis leaves me wondering what so obviously has gone wrong with leadership. You might read Gunning for Justice by Gerry Spence and "learn" morals.

  9. @Michael. I am not sure how you interpreted my post as not caring about people.

    There have three "industrial revolutions" (please pardon the generic use of the term) since the founding of our nation. The first about 200 years ago led to greatly improved agricultural efficiency. The second about 100 years ago led to the transition to a manufacturing economy. In each case, there was a short term negative impact on labor. However, once the transition had been complete, labor productivity improved along with standards of living.

    The third industrial revolution is underway. The impact of the internet has yet to result in higher standards of living and I have read some economists who doubt it will have the same positive impact on standards of living. I have read others who say the the real industrial revolution will result from innovation in energy production. Perhaps that will have the desired positive impact on living standards.

    In any event, the blog post was about macroeconomic trends in global manufacturing. I really didn't focus on labor. However, I believe (as I have said in the post) that these trends will lead to more employment in the US. This is not a new trend nor is it big new. Foreign car makers have been building factories in the US for 30 years. Meanwhile, union membership has been declining for 60 years.

    Union membership has declined for many reasons. Generally speaking, the "business model" of unions is outdated. I wrote about this in my blog a couple of years ago in a post titled, "The Disunion of Dis Union".

    Here's a link if you're interested:

  10. Ralph Michalske, MBA
    Semiconductor Product Marketing Professional

    Hi John,

    It never fails. I'm compelled to read your blogs as they are insightful and well put together. This recent installment is a great example.

    This time you have entered space that I'm very familiar with having spent almost a third of my life working in the automotive industry. Foreign automobile manufacturers building final assembly plants in the US has more effect on jobs in their home country than it does here. For sure, they create 3000 jobs per assembly plant and for this we are grateful. However, the parts that are assembled into vehicles come from elsewhere, not designed, developed, or manufactured by Americans. For example, when Honda installs a radio into a Civic in Ohio, that radio came from Japan. It was designed, developed, and manufactured by Japanese workers, perhaps hundreds of good jobs in Japan were created to get that radio and others to Ohio. In contrast only one or two jobs were created to install those radios in a Civic in Ohio. America has no control over where Honda acquires the sub-assemblies used for a Civic. This is unfortuitous for America, US workers, and our economy. Purchasing imports assembled in NAFTA is highly gratuitous to those brands in terms of employment in their home country. GM taught us this when they began assembling Buicks in Shanghai. Engineering, finance, and technology jobs increased in Warren, MI. GM's component suppliers, mostly US, had to increase their ranks, as well, to keep up with supply to China.

    I'd caution you not to be critical of Germany's rules governing notice to workers. Actually it works as Germany intended. It's their major defense against cheap imports and employment outsourcing. Just because this idea has a high NIH (not invented here) factor, doesn't make it wrong. America needs to embrace new concepts in the 21st century. One would be to regard new ideas as PFE (proudly found elsewhere). America hardly has a monopoly on good ideas.

    When you said, "If you are running a global manufacturing company, you have to consider these factors before you invest in a new factory. So, in a way that some may consider perverse, the absence of those rules in the U.S. is creating more jobs (all over the world)", you should have stopped after the 1st sentence and left it at that. If you're compelled to keep the 2nd sentence, then I've added some words to provide clarity and sustain truth.

  11. @Ralph. Always thoughtful; always articulate. Thanks for your response.

    I certainly lack the perspective of someone who has spent most of his career in the auto industry. But, let's broaden the perspective. Your observation about Honda radios would be the same as your observation about Dodge radios or Chevy radios. If you want to take it down another layer, you could observe that all the nuts, bolts, screws and wires are made in China and all the machine tools are made by Japanese companies.

    My larger point is about American manufacturing although I have used autos as an example at the outset.

    To your point about labor, I stand by my comment. Labor regulation in Europe is an impediment to job growth. The US union model that reached its preeminent stature in the 1950s is obsolete and has been losing ground since that time. I wrote a post called "The Disunion of Dis Union" a couple of years ago. You can read it here:

    Global capitalism and US economic hegemony result from economic freedom that is unparalleled here. The trends driving growth are inexorable. It's up to our important institutions -- including unions -- to adapt or die.

  12. Luke Hedges
    Supervisor, Operations at Entergy

    This was a well written and thought provoking article. I found your comments on the shortage of workers with proper technical education particularly compelling. One of the challenges I consistently deal with is getting new graduates up to speed when they join the organization, as they are often not ready to step in and make a full contribution. Having watched my two nieces recently go through High School, as well as listening to my wife who is a high school teacher, I believe this is a problem that needs to be solved starting with the secondary education system in the country. Despite all the emphasis on STEM you hear in the news, my observations indicate that there are less technically based elective classes and extracurricular activities available to students today compared to when I went to school twenty years ago. I believe that if we want to close the gap and ensure that we have a sufficient supply of domestically trained engineers and technical workers we need to put more emphasis on technology at the High school level both to interest students and to develop the critical problem solving skills that will be required to compete.

  13. Louis Partida
    Navy Range Subject Matter Expert at SAIC

    John, I find it interesting that you brought Germany into the discussion. I look on their government's support and controls as positive to their ability to retain and grow modern and competitive engineering and manufacturing jobs. In fact their success in that facet has no doubt lead to their strength among their failing allies in the European Union. As Ralph illustrates above, these foriegn companies may bring a factory with a few hundred (non-union) assemply jobs to a state/country ready to give them big tax breaks, but the additional transportaion savings and lack of import fees will quickly repay their investment, all the while providing steady demand for their sub-assembly components back home.

  14. Louis Partida
    Navy Range Subject Matter Expert at SAIC

    Now if you had harped on France . . .

  15. Ralph Michalske, MBA
    Semiconductor Product Marketing Professional


    Thanks for your quick reply.

    I can tell you from personal experience that Ford, GM, and Chrysler DO NOT source many components to Asian suppliers. These suppliers will not or can not sign up for continuity of the supply chain or vouch for their materials suppliers. Some sub-assemblies do come from Europe. These are high value-add components with a high NIH factor. Detroit proudly finds them elsewhere. Examples of these sub-assemblies would be in the area of adaptive headlights, adaptive cruise control, vehicle cameras and associated software, advanced navigation systems, electrically controlled steering, and many others. These systems provide features commonly found on high end European vehicles. Okay, I accept that you used the automotive industry to prove your larger point regarding American manufacturing.

    Europe does not have an insatiable appetite for growth. The growth theorem is largely a Yankee Doodle concept. I think Milton Friedman, the famed US economist, was the first to speak of how growth helps a weak economy. Europeans are more interested in sustaining their current employment levels, I. e., not out-sourcing them abroad. In Germany, they believe in labor re-assignment. It works much like gender re-assignment. A man or woman who turns a wrench in an industry no longer needed is re-educated and re-assigned into a trade needed elsewhere in their economy.

    In America, unions have run their full course. They did a lot for the rights of workers during the industrialization of our economy a hundred years ago. Now, worker's rights are codified by US law. Just recently, we codified US worker healthcare which is now universal and affordable. So, labor unionization has become less necessary and is eroding. I'm not sure why you are beating this dead horse.

    Global capitalism does not necessarily play into America's hand. Other countries are raising capital without the help of Lehman Brothers, Merrill Lynch, AIG, or the rest of Wall Street. The issuance of public equity is going the way of labor unions. Private equity will someday exceed all the public equity on Wall Street Exchanges. 21st century capitalism won't look like the capitalism your father knew. Although America invented globalization, our children won't be thankful to us for this, unless they can adapt faster and understand concepts foreign to us now. As you brilliantly stated, Adapt or Die.

  16. I think that global capitalism does play into America's hand. I don't see it as "we win, you lose". I see it as "you win, we win". The rise of the rest will expand the global market for goods and services, produce middle class citizens throughout the free world and reduce the risk of war.

    I bring Germany into the discussion because they are good example of an alternative model that works. There a lot of features of their managed economy that I wish were in place here, specifically the apprentice system. We may be seeing an incipient trend in education that will go a long way toward ensuring we have a competitive workforce.

    The goal of my post wasn't to criticize Germany but rather to point out where we have competitive advantage.

    @Ralph. Thanks for the education on the inner workings of the auto industry. I keep thinking I want to buy a car from the Big 3 but when I reach for my checkbook it never seems to happen.

  17. BTW, Ralph. What happens when the "US" car is made in another country. Does a Mexican assembled Fusion get a US made radio?

  18. Ralph Michalske, MBA
    Semiconductor Product Marketing Professional

    Well John, that depends on the vehicle's end market. For instance, you can't install a radio intended for the US market which has Sirius/XM capability into a European or Asian vehicle. The radio satellites are not geocentric, rather they fly over the poles and North and South America, so Europe can't pick them up. Besides, Europeans don't want radio programming overloaded with talk radio. Their tolerance for Howard Stern is nil. Additionally, UK vehicles must have the LW band on their radios. Cricket matches are broadcast on Long Wave bands and are widely followed by Brits. So, the Fusion would get the radio appropriate for the intended market.

    Big 3 automakers do have final assembly in Canada and Mexico, but they are intended for the NAFTA market. Almost all countries require the Big 3 and others that wish to sell autos there to have domestic assembly plants. The US is unique in that we don't have such requirements. Although Nissan final assembles vehicles in Nashville, they are at the lower end of their product line. Many of their luxury vehicles and the entire Infinity line are still produced in Japan. Same is true of Toyota/Lexus. Volkswagen/Audi/Porche have similar assembly strategies. The Volkswagen plant is brand new in Chattanooga, their Audi and Porche lines still come from assembly plants in Germany. I'd have to say that American workers at these expatriated automobile plants are getting the brown end of the banana from their parent companies.

    Let me say that when it comes to sourcing suppliers for Big 3 automobiles, there is DEFINITELY a bias in Detroit for American automotive suppliers no matter where they're final assembled.

  19. Great perspective, Ralph. Thanks.

    BTW, I agree with the Europeans about talk radio and Howard Stern in particular.