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.
If you subscribe to our Ferrari Consulting and Research Group and Supply Chain Matters Quarterly Newsletter which is available to our blog readers, you have been likely following our tracking of select global / geographic PMI and supply chain activity indices for the past two years.
Our Q4 2015 newsletter update published in January just about concluded that there are evident signs of a global manufacturing and supply chain contraction of substance. The JP Morgan Global Manufacturing PMI remains teetering just slightly above the 50 mark determinant between contraction and expansion.
We now cite another reference for consideration.
Bloomberg View columnist and editorial board member Mark Gilbert penned a recent viewpoint: The Shipping News Says the World Economy Is Toast. In his editorial, Gilbert recalls certain cautionary signposts that were evident prior to the last great recession that began around 2007-2008. These signposts reflected on indices of global supply chain activity that ranged from shipping to air freight and include trends focused on the cost of shipping ocean containers, the Baltic Dry Index of shipping activity (a favorite of investment icon Warren Buffet), air freight, trucking volumes, new truck purchases and others.
Surveying the same review of today’s existing data, Gilbert draws similar conclusions to that of 2007:
“Unfortunately, having survived the storm fanned by subprime mortgages and credit crisis, the clouds are gathering again over the global village we live by; they are getting darker every day.”
Check out the tracking on indices that Gilbert references.
As we opined in our Q4 newsletter commentary, there is little doubt that 2016 will present a rather challenging and uncertain year for global supply chain activity and industry supply chain leaders need to be prepared to respond to various scenarios.
There may well be lots of debate and differing opinion as to whether the world economy is toast, but the signposts are certainly flashing “Caution”.
Last week this author attended Oracle’s Modern Supply Chain Experience conference held in San Jose California. This conference is hosted annually by Oracle, and provides a singular focus on broad supply chain related technology and business process topics. Attendance this year was impressive, upwards of 2000 attendees from multiple industry settings.
I had the opportunity to participate in two different panel discussions. One was the role of sustainability in the modern supply chain. Our panel was moderated by Rich Kroes, Director, and Sustainability Strategy at Oracle and included two other panelists besides myself: Jon Chorley, Chief Sustainability Officer and Group Vice President, SCM Product Strategy at Oracle and James Ayoub, a student at Penn State University.
To its credit, Oracle sponsored the attendance of nearly 80 students from various supply chain management programs both in the local area and across the country. These students were afforded the opportunity to attend general sessions, a dedicated set of student focused session tracks as well as participate in a panel discussion, including our sustainability panel. Our sincere thanks and shout-out to Oracle for their generous outreach and support, was of the first that this author has witnessed from a specific technology company.
Our sustainability panel touched upon various topics regarding how sustainability is manifesting itself across industry supply chains.
On Supply Chain Matters, we have highlighted industry supply chain efforts dating back to at least our founding in 2008. While some initiatives have stemmed from regulatory directives and requirements such as REACH across chemical focused supply chains, RoHS within high tech, or Conflict Materials, others have been spawned from aggressive and committed corporate sustainability goal setting. Many global corporations have declared carbon reduction and sustainability goals mapped to specific timelines and much of the facilitation or enablement of such goals originates specifically within supply chains because product value-chains are responsible for a considerable portion of carbon and greenhouse gas emissions. Consider the carbon emissions footprint of transportation and logistics, manufacturing or agricultural production for example.
Many Consumer Products and Food producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Beverage companies such as Coca Cola, PepsiCo and SAB recognize that large consumption of water is a critical component of a sustainability strategy. They have each appointed senior managers responsible for water conservation and sustainability initiatives that insure supplies of water are continuous.
High profile manufacturers in the high tech and consumer electronics sector such as Apple, Dell, Hewlett Packard and others have always been on the forefront of sustainability initiatives. Across various other industries, innovators have been openly active and committed to sustainability efforts because it drives benefits.
Consumers and customers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. James Ayoub was very articulate in expressing how consumers of his millennial generation care about their environment and factor buying and loyalty decisions based on the reputation of the brand in active sustainability efforts. James further shared highlights of internship efforts in supporting corporate initiatives in this area as well as how Penn State’s supply chain management programs and academic instructors weave sustainability into the curriculum.
Jon Chorley noted the dual role of Oracle in the area of sustainability, first as a corporate citizen and in providing technology that supports the management and tracking of such efforts. Having inherited a high tech manufacturing supply chain from the past acquisition of Sun Microsystems, Oracle inherited a high tech manufacturing value-chain with many opportunities for continued efforts in sustainability. As Chorley exclaimed to the audience, it makes good business sense to have sustainability weaved into business strategy in four impactful dimensions:
- Innovation- both product and process focused and in supply and value-chains that become self-sustainable
- Enhancing the Brand– Consumers and customers making their buying decisions not only on product form and function but on the brand’s commitment to sustainability and combating climate change.
- Strategy and Stockholder Value– Sustainability efforts insure strategic continuity of supply of commodities, raw materials and natural resources. They insure that a firm has plans and strategies that can support long-term competitiveness and industry leadership.
- Cost– in carbon and missions reductions that save our planet and in the monetary costs of materials, processes, product packaging and movement of goods.
I also had the opportunity to share with our audience my perceptions of the potential industry supply chain impacts from the recent Paris climate agreement. In December, 195 nations became parties to the Paris Climate Agreement (COP21) that commits to holding the increase in global average temperature below 2 degrees Centigrade (3.6 degrees F) above pre-industrial levels and to pursue efforts to limit temperature increase to no more than 1.5 Celsius above pre-industrial levels.
Whereas the prior Doha Agreement among 37 nations, the new Paris Agreement addresses climate change challenges after 2020. The Paris Agreement further represents the first time that such a large portion of the global countries have explicitly declared that the existence of climate change and heighted greenhouse emissions provides global risk.
From the accounts that I have read, the implication of this Agreement reflect clear messages that much of the globe’s remaining reserves of coal, oil and gas must stay in the ground. Reduction of deforestation must become global-wide priority.
The implications of such goals are yet to be fully understood by industry and supply chain audiences. One European based research firm declared that supply chain mitigation initiatives will be the Number 2 most effective strategy for achieving COP21 commitments.
Our panel concluded with thoughts that under COP21, industry supply chain involvement in sustainability has little choice but to move into a mandatory stage. Think of all the ships, railways, trucks and equipment that make-up the global movement of goods. Think about current manufacturing, assembly and farming processes primarily powered by fossil fuels and you begin to get a sense of the seriousness of this next stage. Businesses and their associated supply chains must take on a more implicit responsibility to act in ways never before, in with innovation of a large scale.
Thus, vision and leadership among both public and private sectors is now a must and critical for alignment of efforts in joint investment, in policy, in rewards and in penalties. Because supply chains are intrinsically global in scope, there will be requirements for far broader collaboration within and across industries, suppliers and service provider communities to overcome these new challenges.
I very much enjoyed discussing such an important topic with my fellow panelists and I thank Oracle for the opportunity as well as the commitment to the topic of sustainability.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Last week, commercial aircraft provider Boeing transmitted a supply chain shock wave by forecasting that the manufacturer would deliver less commercial aircraft in 2016 than actual deliveries in 2015. The news itself triggered a sell-off in aerospace related stock and raised somewhat more uncertainty across aerospace industry supply chains.
Whereas Boeing delivered a total of 762 aircraft in 2015 while declaring a year of outstanding operational performance, the current forecast is a range from 740-745 commercial aircraft produced in 2016.
Boeing executives indicated that the change involves a revised focus on the provider’s most profitable aircraft as well as the effects of the transition to new aircraft programs such as the 737 MAX program where deliveries begin to occur in 2017.
The revised forecast surprised equity analysts and literally rippled across the industry sending shares of major suppliers also tumbling.
As Supply Chain Matters has noted in our specific aerospace industry commentaries, building multi-year backlogs among both Boeing as well as Airbus are both good news, not-so-good news scenarios. Programs such as Boeing’s 787 Dreamliner need to considerably ramp-up deliveries in order to meet breakeven program profitability milestones, while newer, more fuel efficient aircraft such as the 737 MAX and the Airbus A320neo were marketed to airlines during a time of much higher jet fuel prices. Meanwhile, various global airline carriers particularly those in the Middle East and Asia want to rapidly expand service routes to take advantage of perceived increases in air travelers. Today’s cycle of economic uncertainty brought upon by lower oil and plunging commodity prices, coupled with increasing global tensions have possibly changed near-term demand for air travel.
Only time will determine how industry dynamics shakeout. In the meantime, commercial aerospace supply chain suppliers must now perform a balancing act of adjusting to changing and concerning signals from at least one dominant OEM.
In prior Supply Chain Matters commentary as well as 2016 predictions, we have raised awareness relative to the impact of increased parcel transportation rates on B2B and B2C online commerce. At the beginning of 2016, major parcel carriers FedEx and UPS initiated new 2016 rates and added surcharges, and the United States Postal Service (USPS) has now initiated its own 2016 rate hikes averaging 10 percent.
While our commentaries have focused on multi-industry impacts, there is certainly a small and medium business impact, one perhaps more acute relative to business impact.
Thus, we highlight perhaps one of growing representative evidence of such impacts. A published article originating from Maine’s Portland Press Herald, brings forward such impacts. (Metered free view). The article profiles two small but up and coming Maine based businesses, Dresden based Maine Medicinals and Winslow based Johnny’s Selected Seeds. The latter business is one that this author has been a fan of for many years.
Both businesses bring forward the realities of today’s online world, that consumers and customers incorporate shipping charges in their buying decisions. In the case of B2C online fulfillment, Free Shipping has become the norm as a result of the track record of Amazon Prime. Yet, more and more, retail executives have come to understand the new realities of increased costs associated with online fulfillment. Thus, as indicated by executives in the featured online businesses of the Press Herald report, the costs of shipping must now be adsorbed or offset by other cost efficiencies.
The other reality brought forward in the report is how the USPS was looked upon as the contingency strategy to avoid the higher transportation costs of the large parcel providers. Now, that option is off the table since the USPS needs to deal with its own needs for agency profitability on costs. More succinctly, the message brought forward is that in many cases, increased transportation costs stand to now directly impact the bottom line of many SMB businesses anchored in online commerce. Shipping fees can no longer cover the full cost of transportation and handling, and something has to give.
We suspect that among many SMB businesses, there is a hope that other viable, less costly transportation and handling options will become available. Within these building needs, online giants such as Alibaba, Amazon, Ebay and perhaps Walmart remain continued disruptors, offering hosted fulfillment services.
Unless and until more disruptors come forward, the market swath and influence of a few online commerce dominants may well continue and SMB’s will be among those most impacted.