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“Much Ado About Nothing”/”The Art of the Deal”

Sigma Investment Counselors

January 11, 2017

First, credits to William Shakespeare and Donald Trump.

Now, the “Much Ado About Nothing” part of the discussion.  Recently, Mr. Trump has expressed displeasure regarding several auto industry vehicle assembly strategies.  He criticized GM for importing a few thousand Chevy Cruzes from Mexico, even though nearly all Cruzes, for sale in the US, are assembled in Lordstown, Ohio.  He chastised Ford for its plans to build a facility to assemble additional Focuses in Mexico.  Ford already assembles Focuses in Mexico and has canceled plans for a new facility after concluding that demand for small cars does not warrant a new factory.  Ford has committed to spending an additional $700 million on electric and autonomous vehicle research and development.  Toyota wasn’t left out and was criticized for planning to build an assembly plant for Corollas in Mexico, even though most Corollas built for the US market are assembled in Mississippi.  The auto industry assembles small vehicles in Mexico, primarily because assembly labor is relatively less expensive, and the primary market for small vehicles is outside the US.  Mexico has attractive trade agreements in many key international markets.

Toyota is likely to go ahead and add capacity for small cars in Mexico for economic reasons.  Whether any of these will come to the US will probably depend on how the tax on cars assembled in Mexico and shipped to the US compares with adding capacity in Mississippi.

Fiat Chrysler has been left out for now, and may have bought some time with its recent announcement of expanded truck and SUV capacity in Michigan and Ohio that is expected to provide 2,000 new jobs.

In the face of higher costs and decreasing US demand for fuel efficient econoboxes, don’t expect any material new small car assemblies in the US.  It should be noted that vehicle assembly labor approximates 11% of the total cost of the vehicle, with a higher percentage for smaller cars and a materially lower rate as the price of the finished product increases.

Turning to the “Art of the Deal”.  The real money in the vehicle business is in bigger, costlier trucks and SUVs.  Fuel economy requirements, the enemy of bigger and faster, are scheduled to increase significantly over the next few years, but are up for review in a few months.  Some adjustment to longer term fuel economy standards would be very helpful to the industry as it seeks to maintain demand for its most popular and profitable products.

It would seem that auto executives might be willing to accept some “tweet lashing” in exchange for market based fuel economy standards.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

 

 

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