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. 

WHO WILL LEAD?