Report That Ford is Planning to Double Production Capacity in Mexico- The Political Dimensions Become More Prominent
In August of 2014, we initially alerted our Supply Chain Matters readers to the growing attractiveness of Mexico as a North America based Manufacturing and export hub for the global automotive industry. At the time, automotive OEM’s BMW, Honda, Kia Motors, Mazda, Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. That process has continued. Today, The Wall Street Journal reported that Ford Motor Co. has plans to more than double its Mexico based production capacity by 2018. The decision, if confirmed, has many further implications from many dimensions, including the political dimension.
As we observed in 2014, Mexico’s attraction stems from two strategic considerations. The first is to serve as an alternative global manufacturing region in the context of lower direct labor costs as well as to offset global currency impacts. The second is serving as a hub of automotive exports to serve both North America and other global markets because of the former considerations.
Citing informed sources, today’s WSJ report indicates that Ford will build an entirely new assembly plant in Mexico as well as expand capacity of a current facility. The new assembly complex is expected to be built in San Luis Potosi with an annual capacity for as many as 350,000 vehicles per year. A separate expansion is being planned for Ford’s Cuautitlan production facility near Mexico City, which will reportedly augment production capacity for an additional 150,000 vehicles annually. Total invested cost is noted as $1 billion, on top of the $2.5 billion in investment that Ford announced last year concerning a new engine and transmission production facility.
As for models being considered for Mexico production sourcing, the WSJ indicates the current Ford Focus is scheduled to transfer production from a U.S. facility in Michigan within the next two years to make room for more profitable truck based vehicles. Two other new models are being planned for Mexico, one being termed as an all new hybrid car designed to compete with Toyota’s Prius hybrid. Ford already produces two other midsized sedans in Mexico. The WSJ views Ford’s product strategy as having higher margin product models such as SUV’s and pick-up trucks sourced in U.S. plants under labor union contracts, with lower margin models sourced in Mexico and other foreign countries.
The WSJ report’s editorial reflects that Ford’s latest moves are indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raises direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates are indicated as being one-fifth that of unionized workers in the U.S.
Ford itself refused to comment on both the WSJ report as well as its editorial related to offsetting direct labor costs.
Speculation that Ford was considering an increased manufacturing presence in Mexico has been cited among certain candidates in the U.S. Presidential election cycle, and not in a positive manner. The politics of such a decision are ripe given that certain U.S. states with unionized workers will vote in presidential primaries over the remainder of this year, and states like Michigan, Ohio and Illinois have influence in delegate and Electoral College voting. Presidential Republican candidates such as Donald Trump while democratic candidates Bernie Sanders and Hillary Clinton echo the fears of more jobs being lost to Mexico and other countries. Then there is the rhetoric in Republican ranks of building higher walls on the U.S. and Mexico borders to stem illegal immigration and protecting jobs.
As our Supply Chain Matters readership is well aware, major production sourcing decisions have broader implications, the need for many dependent suppliers to also increase their sourcing presence to supply production in Mexico. This is especially important in automotive supply chains that are mostly driven from just-in-time production and inventory movement methodologies. The greater the investment presence in a single country, the more value-chain presence occurs, adding to more investment.
The Trans Pacific Partnership Agreement when and if ratified, will provide even more implications to multi-industry global sourcing strategies, especially automotive. No doubt it well heightens more political discourse on job creation or job loss among North America countries. Mexico itself threw a monkey wrench in ongoing talks hoping to preserve the current automotive sourcing investment wave and to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S. Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free.
Mexico recently overtook Japan to become the second-largest exporter of vehicles to the U.S. The WSJ report cites data from LMC Automotive indicating that auto factories in Mexico produced 3.4 million vehicles in 2015, about one-fight of all North America production.
U.S. and other global-wide political leaders, whether current or aspiring, should be concerned with such global supply chain strategic sourcing decisions. This latest WSJ report cites Mexico’s economy minister as indicating that there will be several other significant automotive industry investments announced in the not too distant future.
The obvious takeaway is that in the current period of trending reflecting global manufacturing recession and consequent heightened concerns for global trade and local economies, strategic sourcing decisions will take on heightened political dimensions, and such an environment transcends quantitative data such as direct labor and landed costs. Beyond analytics, quantification and spreadsheets are the politics of jobs and economic security, which are taking on far more concern.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This Editor had the opportunity to view our Supply Chain Matters readership analytics (thanks to Google Analytics) for all of 2015 and can now share our ten most popular 2015 commentaries during the year.
In reverse order:
Highlights of the APICS Annual 2015 Conference held in Las Vegas in October, and specifically ex-GE CEO Jack Welch’s keynote interview. Welch expressed a number of insights on the topic of leadership, and more specifically, supply chain management, and the professionals who manage today’s supply chains. We are very pleased that this commentary made our top ten.
Our September commentary related to Tesla Motors contracting of strategic supply of lithium for its new gigafactory. Our commentary addressed the broader strategy unfolding, one that extends beyond automotive supply chain needs, including the power storage needs of homes and businesses. The site was chosen because of its close proximity to supplies of the all-important raw material of lithium as well as to the Tesla factory in California.
It seems that our readers were quite interested in all news related to Tesla since the auto manufacturer appears twice in our Top Ten.
Our July commentary addressing the needs of supply chain business intelligence for SAP environments, specifically that as supply chain business processes become ever more complex, teams try to fill the gaps with downloads of static reports and ancillary spreadsheets to provide more meaningful operational analysis. We felt and sense that this is indeed representative of the broader SAP community, and brought awareness to other options. Our commentary brought wider attention to Supply Chain Matters Named sponsor Every Angle Software who’s self-service operationally focused business intelligence tool includes an extensive list of European installed base customers with SAP backbones.
Our January commentary, “Extended supply chain” is the new supply chain, a guest contribution by Prashant Mendki, Director Alliances and Business Development for supply chain systems integrator Bristlecone. The commentary called for a holistic “integrated extended supply chain” rather than independent business processes where the entire ecosystem would be treated as part of the supply chain, and where suppliers would have complete visibility into key customer demand and have their response plan ready.
Our September market education commentary bringing visibility to Xerox’s new more cost affordable smart labeling technology and the availability of two printed electronic labels that can collect and store information about either the authenticity or condition of products flowing across the supply chain. From our lens, the availability of such advanced labeling technology will foster new, more affordable dimensions of item level tracking, security and authenticity specifically related to products. This author characterized the development as the dawning of item-level tracking technology that industry supply chain teams have versioned for quite some time.
The highlights of our Supply Chain Matters interview with Irfan Khan, CEO of Bristlecone while attending the Gartner Supply Chain Executive conference. Our interview touched upon a number of areas including predictive analytics applied to supply chain decision-making needs. Irfan opined that mainstream acceptance of the full spectrum of smarter analytics (Descriptive, Prescriptive and Cognitive) applied to supply chain and manufacturing capabilities will take additional time for most organizations to be fully prepared to leverage. He confirmed organizational change management readiness and client skill impacts that take time to work through
Oracle’s July announcement of expansion of public cloud capabilities applied to order fulfillment, specifically Oracle Order Management Cloud and Oracle Global Order Promising Cloud. Out takeaway for readers was that Oracle remained committed toward a broader development and release plan surrounding SCM applications in the public cloud platform than perhaps other competitors such as SAP.
Later in 2015, in conjunction with Oracle Open World, the full Oracle SCM Cloud suite was announced by Larry Ellison in his opening keynote. From our lens, Oracle had developed one of the broadest cross-functional supply chain management, public cloud based applications currently available in the marketplace. That stated, there are qualifiers in that this public cloud suite provides standard functionality as opposed to the ability to support customized customer business needs. Its strength resides in faster time-to-value and potentially lower IT infrastructure deployment costs.
Our highlights and impressions regarding the FedEx acquisition of both Genco and Bongo International. Genco was one of the largest 3PL’s in North America and Bongo International provides an e-commerce platform that facilitates international customers purchasing items from domestic websites. We were intrigued by the low price paid for Genco which as less than current earnings.
Our February commentary reflecting on Tesla’s operating results reflecting some supply chain strains. Our observation was that while showing some supply chain strains at the end of 2014, even more challenges remained for Tesla’s supply chain in 2015. Tesla has often demonstrated the effective use of advanced technology applied to manufacturing and supply chain business processes, and that 2015 will be no exception to that trend.
We just published a follow-on commentary reflecting on Tesla’s 2015 delivery performance leaving some Model X customers rather frustrated.
Finally, our Number One most read 2015 content was:
Our unveiling of the full listing of 2016 Predictions for Industry and Global Supply Chains published on December 15th. We interpret that to mean that our readers are keenly focused on what lies ahead in the New Year, and that’s OK with us.
We trust that all of our line-of-business, IT and cross-functional supply chain readers have gained value and insight from our independent lens on supply chain focused business developments, business process and technology challenges among various industry and global perspectives. We believe we have accumulated a truly in-depth library of industry-specific and functional content.
Once again, as we enter our ninth year and remaining as a top ten or top twenty-five presence among supply chain blogs, we again thank our loyal global based readers and our sponsors for their continuing support.
Bob Ferrari, Founder and Executive Editor
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.
Content appearing on Supply Chain Matters® may not be used by any third party without written permission of the author and/or our parent, The Ferrari Consulting and Research Group LLC.
Tesla Motors has indicted that it delivered 17,400 vehicles in the fourth quarter of 2015, nearly 50 percent more than the 11,627 vehicles delivered at this same period a year ago. Yet, the bloom is somewhat off the rose when considering certain Tesla customers delivery expectations.
Tesla reportedly met its internal goal to deliver more than 50,000 total vehicles in 2015. However, customers who made deposits as far back as three years ago to secure the new Model X SUV remain disappointed. That model has undergone a series of repeated delays.
According to published reports, customers who made $40,000 deposits in 2013 to insure they would be the first to secure the Model X are growing increasingly frustrated. After missing its initial availability date of 2013, the Model X was finally released for deliveries in September of 2015
Since the September release, Tesla has delivered only 208 Model X’s to paying customers vs. the more than 20,000 reservations logged worldwide according to an unofficial tally from a Tesla fan group. In its reporting, The Wall Street Journal indicated that Tesla initially delivered the long-awaited SUV to executives and important investors, and then to “Signature” reservation holders who placed deposits in the winter of 2012.
Tesla itself indicates that production rates for the Model X have now increased to 238 SUV’s per week. At that rate, it will be upwards of two years just to deliver vehicles to reservation customers without additional boosts in production.
Tesla’s founder Elon Musk has characterized the Model X as “The hardest car to build in the world.” That could be interpreted to mean the most sophisticated engineered vehicle but not necessarily one designed for higher volume manufacturing. Its falcon wing doors and air filtering system are examples of engineering accomplishments but call into question needs related to design for higher volume manufacturing. Luxury seat manufacturing was recently moved from a supplier, in-house to Tesla’s production facilities because of quality and volume needs.
The phenomenon of Tesla is one where customers are more than willing to pay more than $100,000 to secure a luxury premium, electrically powered automobile. Its brand is powerful among affluent buyers. However, Tesla’s longer-term financial success stems from its abilities to provide automobiles to broader categories of buyers.
Manufacturers with a pronounced engineering-driven culture are sometimes challenged with the needs for what is termed “design for supply chain”, where common design and components can be leveraged among multiple product types and where consistency in quality can be maintained. Many global auto manufacturers have struggled to achieve these concepts.
Make no mistake, Tesla’s product designs are extraordinary and have broken new ground in engineering, performance and elegance. That same energy and resolve must continue to be directed at the company’s abilities to sustain higher levels of volume manufacturing and a globally extended supply chain.
Then again, if you currently own a Tesla, rest assured your investment was a good one, since global product demand remains unfulfilled.
Just prior to the Christmas holiday, the emissions scandal involving Volkswagen took on a concerning supply chain slant. German government investigators announced that they are investigating employees at major supplier Robert Bosch in connection with the ongoing probe of whom is responsible for altering the software that controlled emissions of automotive diesel engines.
Under German law, no corporation can be held liable for criminal wrongdoing, thus prosecutors hone in on specific individuals working at corporations. Previously, investigators had been interviewing internal Volkswagen senior managers and engineers that could have altered emissions related software code. The new probe involving a major branded global supplier such as Bosch places on a broader emphasis on the ongoing probe. However, prosecutors have stressed that the investigation is at an early stage and no Bosch employee has been implicated at this point.
According to news reports, a spokesperson for the Stuttgart prosecutor’s office indicates that Volkswagen itself did not develop the subject software, hence the widening of the investigation. For its part, Bosch has indicated that it will fully cooperate with agencies concerning the ongoing investigation. Bosch’s defense is that while it provided the hardware and software components involved in emissions control, it does not have responsibility as to how these components are integrated into a vehicle’s overall system.
The ongoing investigation has already led to resignations or reassignment of several senior executives at Volkswagen. With the probe widening to other elements of the vehicle value-chain, there is no telling how the investigation will ultimately turn-out.
In any case, the implications that design engineers or executives could be held personally accountable for criminal intent have obvious wide-reaching implications, not only for industry as a whole, but for Volkswagen and its supplier partnerships.
Time will tell how this saga transpires in the coming year.
Within our 2016 Predictions for Industry and Global Supply Chains, Prediction Five called out specific industry challenges in the New Year, which included automotive supply chains. An unprecedented level of regulative scrutiny has precipitated a large amount of product recalls that are taxing service focused and repair parts supply chains.
On Monday of this week, U.S. auto safety regulators fined luxury automaker BMW $10 million, part of a $40 million civil settlement over the German automaker’s safety lapses. The fine is the second paid by BMW since 2012 and the latest in a series of civil penalties imposed on major automakers by the National Highway Traffic Safety Administration (NHTSA).
Under the settlement, BMW admitted it did not comply with minimum crash protection standards, failed to notify owners of recalls in a timely fashion and failed to provide accurate information about its recalls to NHTSA.
According to a syndicated published report by Reuters, this settlement ends a NHTSA investigation into whether the company failed to issue a recall within five days of learning that it’s 2014 and 2015 Mini Cooper models failed to meet regulatory minimums for side-impact crash protection.
The $40 million settlement includes a $10 million fine, a requirement that the company spend at least $10 million meeting the order’s performance obligations, and $20 million in deferred penalties if the company fails to comply with the order or commits other safety violations.
BMW agreed to hire a government-approved independent safety consultant and disclose updated procedures to NHTSA. The agency has required a number of automakers to agree to independent monitors or retain outside consultants to improve safety procedures as part of settlements.
Of course, the most visible development in this area will be how government regulators ultimately deal with Volkswagen and its admission of circumventing air pollution standards in the U.S. and other countries.
Earlier this month, the agency fined Fiat Chrysler Automobiles $70 million for failing to disclose vehicle crash death and injury reports. That automaker was obligated to pay $70 million in July to resolve allegations it mishandled nearly two dozen recall campaigns covering more than 11 million vehicles. In January, Honda paid $70 million in fines for failing to disclose death and injury reports.
Hundreds of millions of dollars in fines may well be better invested in advanced technology that mines vehicle performance and repair incidents and more proactively alert regulators to issues. Then again, some dis-investment may be required to impress upon senior management that the implications for not conforming to timely regulatory reporting is a reduced performance bonus equivalent to the company’s cost of fines incurred.