There are two key issues in the US auto industry at the moment.
Number one: SUVs and pickups are selling like crazy. US sales this year could equal or top 2015’s record of 17.5 million, driven largely by consumer demand for crossovers and pickups.
Passenger cars are another story. Sales have been weak, leading some automakers, notable Fiat Chrysler Automobiles, to back off from US production in order to use that manufacturing capacity to build more trucks.
Moving the assembly of those vehicles to Mexico, where many automakers have or are constructing plants, is an appealing solution.
But Donald Trump attacked these plans during the election, even though his preferred target, Ford, has been operating in Mexico since the 1960s. As a candidate, he threatened to slap a 35% tariff on vehicles built in Mexico coming into the US.
Number two: Automakers are up against rising fuel-economy standards. The Corporate Average Fuel Economy (CAFE) requirements for the large automakers selling vehicles in the US are suppose to rise to 54.5 mpg by 2025 — a goal that federal and regulators think is unlikely to be met, and that the automakers have been lobbying against.
Hard to come up with grand bargain
You can probably see where this is going. Trump wants to make trouble for the automakers on the North American Free Trade Agreement front, demanding that they stop outsourcing production south of the border. But if his EPA shapes up to be as corporation-friendly as many suspect, the carmakers stand a pretty good chance of getting a CAFE break.
They will love that. But given that major car companies are investing $24 billion in Mexico, according to Bloomberg, they’re going to hate whatever inflexibility a Trump administration imposes on them.
There really isn’t an easy way to deal with this, resolving the two big issues to everyone’s satisfaction. Auto labour costs are not going to decline in the US to anything that even vaguely resembles what they are in Mexico, where a worker will be paid $10 an hour while a US worker could get close to $60.
Auto manufacturing jobs are also skilled-labour positions, and employers have to pay for that skill, depending on the market they’re operating in. The calculations that US carmakers are being compelled to confront is the meager profits of smaller passenger cars versus the fat profits of trucks and SUVs; they’d like to use their costly US labour force to build their most profitable vehicles.
The linkage with the CAFE debate is of course that building a lot of trucks and SUVs — the vehicles that consumers wants — runs counter to meeting the CAFE goals. So automakers would like to catch a break there, so that they can bank as much money as possible now, while the US market is booming at gas prices are low.
This suggests that although a love-hate relationship with Trump may persist, there could be some horse-trading that takes place.
NOW WATCH: Trump said he prevented a Ford factory from leaving the US — but the company says the move was never planned
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