It seems that Ford has thrown gasoline on the political fire by announcing that they are moving their small car production to Mexico. You can almost hear the “build the wall” chants in the background. But the more you ponder this, the more difficult the problem of what you might do about this becomes less and less clear.
Let’s start with just a little math first. As near as I can tell, labor cost is about 15 to 20% of the total cost of a car. But no car company publishes this number, so it is very uncertain. If we use the high side of the estimate on a $25,000 car, we have a labor cost of $5,000 per car. Just to make up a number, let’s say that moving to Mexico saves half the labor cost, $2,500 per car. These numbers are probably very high, but the problem gets even stickier if the labor cost is lower and the savings less.
So, let’s try a few scenarios and see what happens.
So, let’s start with the simple and simplistic Trump solution. Trump thinks that he is going to call up Mark Field and say, “Mark, if you move the plant, I’ll slap a $2,500 tariff on each car!” And Ford, shaking in it’s boots will change its plans. Well, except congress passes taxes and a tariff is a tax. And what congressman wants signs in every Ford dealership reading, “New Higher Prices brought to you by your congressional representative!” But I will let you decide whether the threat of a tariff would be enough to keep the car plant here.
The Democratic idea is something along the line of since moving the plant will increase profits, we’ll have a windfall profits tax on rich people and we will take some of those profits back into the public realm and redistribute them.
I don’t think either one is going to keep the plant here, but go ahead and make your case for either approach.
The other side of the problem is that if the plant leaves, we will probably provide some sort of job retraining for those affected, but if there are no jobs to go to, what difference does training make? It really is a hard nut to crack and I really am looking for new ideas.
One thought I have is that, actually, the Mexicans are getting the raw deal on this one. Think Cleveland in the 1970s. Assuming that Mexican environmental and safety laws are not as stringent as ours, they are getting a future mess on their hands. Mexican Rust Belt anyone? Besides, since companies are moving there for low wages, there is not going to be much wage growth to go with the increased employment. And low wage jobs don’t actually grow the economy. Low growth and pollution…Thanks America!
Then there is the idea that it is not so much location that matters. According to this: Mercedes has the highest labor cost in the auto industry and Volkwagen is listed as the lowest. At least part of the difference between the two companies is surely the amount of automation that they use in the manufacturing process. Small cheap cars are made cheaply. Big expensive cars get more hands on treatment. Ford points out that they are increasing investment in big car (such as SUV) production here in the US. So, even if the plants stayed here they would be more and more automated and use less and less skilled labor. Once again, maybe we are better off to export these jobs.
Another question is about the future of the car industry anyway. Some people are predicting a future where the only people who own cars are Uber drivers. And then those drivers get replaced by computers. Perhaps the auto industry as we know it is on the path of the buggy whip industry. Once again, exporting our dinosaur plants could actually be a good idea.
Just one other thing, when Obama wanted to bail out the auto industry (and for many years before that, frankly) there were lots of complaints that labor (unions especially) had pushed up the cost of labor so high that they were the ones putting the car companies out of business. But now, those are the very jobs that the electorate seems most nostalgic for. We can be pretty sure that cheap cars and high wages are not going to be on the same plate anytime soon.
Or we can just say, its the free market and you can’t fight the market.
I used to think I might know the answer to this kind of situation, but I don’t any more. I’d love to hear what proposals you have and what you think.