When Trump states that he will create a tariff in order to keep businesses form exporting U.S. jobs, the threat is real. There is a huge possibility that Trump will back out of NAFTA if the trade agreement is not advantageous to the United States. The manner that he has criticized NAFTA throughout the election and since his presidency indicates that Ford made a politically correct decision when concentrating production in Michigan rather than Mexico. Since 95% of Ford’s profits in in the United States are the result of U.S. factories, the decision is one that will not impact Ford’s bottom line: “…95% of all Ford car sales in the US come from US-located plants” (Nollen). The way that I see it, Ford made a popular decision that will increase internal revenues for its own sales. Customers will perceive that Ford, an iconic American company, is actually made in the United States.
Ford needs to protect the 95% of its sales, which as stated above are domestic in the United States. The cause for concern, when pulling out of the Mexico deal is that there were infrastructures being built in Mexico to accommodate Ford (Nollen). Furthermore, when considering Ford’s value chain (Kennedy), the competition is capitalizing on foreign import to the domestic market, whereas Ford will be unique in its position to pull out of Mexico. The relationship between Ford and its competitors will create the perfect comparative analysis when distribution costs are assigned in the coming years. It is the production and distribution costs, along with the transaction costs, which may improve with Ford’s decision, based on Trump’s ultimatum.
Mazda has not been an American-made company, unlike Ford. It seems that their profits are split fairly evenly between U.S. markets and the rest of the world (Nollen, Exhibit 4). However, given that the U.S. market represents roughly 50% of Mazda’s sales, it would be best to invest in the United States economy by having factories in the U.S. rather than Mexico. This decision would be prudent based on the tariffs that will be imposed on foreign imports. There may be incentives that would make up for high costs of United States factories, such as offsets in the taxation that Mazda would receive while in Mexico. If Trump pulls out of NAFTA, it is important for Mazda to retain good working relations in Mexico because it can use the Mexican plant to export to the rest of the world. Mazda should refocus on the United States market by also maintaining factories in the United States in order to protect 50% of its U.S.-based business.
I expect that the impact of Ford’s decision will be advantageous for 95% of their business, however it will degenerate the remaining 5% of international sales. The sales are not going to fall apart because of any poitical affiliation, but rather because it does not make sense, in Ford’s value chain, to focus on salvaging the exported sales when the profit margins are higher in the United States. Furthermore, Ford may receive a kickback for initiating the action that Trump has requested, being a forerunner in the move to create United States jobs rather than relying on outsourcing. There are many advantages to Ford’s decision, and these advantages will be secondary to the actual cost of production. The impact on consumer relations, and political approval will ultimately outweigh the loss of reimbursement to the Mexican government, and the higher costs of initial production. Therefore, most likely, Ford has made the correct decision in focusing on the plant in Michigan, regardless of the losses in Mexico.
- Kennedy, Robert and Tom Lantos. “Note on Managing the Value Chain: Governance, Location, and Firm Scope Decisions.” WDI Publishing, 2010.
- Nollen, Stanley. “Ford in Mexico.” EMBA School of Business, 2017.