Tuesday, June 27, 2017

Tesla and Ford Move To China And President Trump Says Nothing

Alexander Carabitses

(Image credited to TheWhiteHouse.gov)

The last two weeks have featured several pieces of auto industry news that are quite significant.  Most recently, the airbag supplier, Takata, has filed for bankruptcy and is being sold to a Michigan-based supplier, which itself is owned by another Asian supplier.  I don't have too much to say on this since it was the inevitable conclusion for the troubled supplier after spending billions of dollars to replace defective airbags.

The two bigger pieces of news that I want to concentrate on are a pair of stories from last week regarding the production plans of two well known American car companies: Tesla and Ford.  For those who are unaware, Ford announced that it would manufacture the next-generation Focus in China, rather than Mexico.  Ford cites cost savings of $1 billion by choosing to build the car in China, rather than Mexico.  I view this as a great example of the changes that Jim Hackett has already begun making in order to boost Ford's profitability in light of poor earnings in recent years. Further cutting the production costs of a vehicle that has low-profit margins and isn't selling well in its home market seems like a great move that should pay for itself in the long run.  That is of course unless President Trump does eventually impose a 35% tax on all cars that are imported to the US. However, even if that were to happen, it is better to pay one heavy import tax from the US, rather than one from the US and China. I honestly feel that this was the line of thinking that went into this decision.
(2015 Ford Focus- Image credited to Ford)

Likewise, Bloomberg also hinted last week that Tesla is close to striking a deal that would allow it to assemble cars in Shanghai, China, in an attempt to reach its goal of selling 500,000 cars by 2020.  Last year, Tesla sold around 80,000 vehicles globally, meaning that it is far off from hitting its goal.  Common sense also dictates that having a single plant to handle the production of 500,000 vehicles is unrealistic, especially since the brand plans on launching the Model 3, the Model Y crossover, and an electric semi-truck.  However, due to Chinese law, Tesla will be required to form a partnership with a local automaker, so it will be interesting to see who Elon Musk strikes a deal with.  However, what I find most interesting about Tesla and Ford's news is that President Trump has not attacked either company or China for these moves. Given everything that he had to say about China during his Presidential campaign, as well as all that he's continued to say about Mexico and Germany's trade policy (sarcastically saying that the US should ban the sale of German cars), many are wondering why he has yet to speak up.

In the end, I think that a lot of it comes down to politics.  Right now, President Trump is working closely with the Chinese government to crack down on North Korea and put an end to all of the nonsense that the country is up to.  It would not be wise for him to attack the country that he's working closely with, as that could potentially hurt relations at the worst possible time, given the political circumstances. For the same reason, even attacking the automakers would be a bad move at this juncture. To put it simply, it would essentially be President Trump attacking two American companies for supporting the economy of a close ally, at a time in which the two allies are getting along quite well and are en route to progress in the long term.  See the problem?

There is also another reason that is more applicable to Tesla.  We already know that China has a 25% import tax on vehicles that aren't built in the country, so from a business perspective, Tesla was in a difficult position since it sees more growth potential over there.  Due to this trade policy, President Trump would make himself look like a hypocrite if he shamed a company for trying to avoid an import tax that he, himself, criticized during his campaign.  Plus, he has previously met with the Big Three CEOs and has certainly been made known of the fact that China accounts for more car sales than any other country in the world.  Finally, it is very unlikely that Tesla will export any of its Chinese-made cars to the US in the near future, as this move has been made to gain a competitive advantage in China alone.

Of course, President Trump is known for being unpredictable, so we'll still have to watch closely to see if his stance on the matter changes in the near term.  In the meantime, I must admit that I am very impressed with both Tesla and Ford's latest business strategies.

Thank you for reading and have a good week.

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