Here's what's really going on with Ford and its Kentucky plant that Trump tweeted about

Late Thursday night, president-elect Donald Trump tweeted that he
“got a call from my friend Bill Ford, Chairman of Ford, who advised me that he will be keeping the Lincoln plant in Kentucky — no Mexico.”
As Business Insider’s Chris Sanchez reported Thursday night, Trump followed that tweet with this one: “I worked hard with Bill Ford to keep the Lincoln plant in Kentucky. I owed it to the great State of Kentucky for their confidence in me!”

Apart from Trump potentially making trouble for Ford’s executive team by revealing details of conversations he had with Bill Ford — who has far as I know has never publicly commented on anything related to the automaker’s production since stepping down as CEO in 2006 — the core issue here is that Ford wasn’t contemplating any job cuts at the Louisville Assembly Plant, but wanted to replace production of a Lincoln vehicle, the MKC luxury crossover, with a mass-market SUV, the Ford Escape.

The vehicles share a manufacturing platform, which was developed in Europe as a vehicle called the Kuga.

Ford confirmed that it had considered moving MKC production to Mexico, but had jettisoned that idea.

MKC production in at Louisville is dwarfed by Escape production — the former has sold around 20,000 units year-to-date, while the latter has sold more than 258,000, amid a boom in smaller crossovers and record sales levels in the US. The Lincoln sales are respectable, but the Escape sales are evidence of strong demand that Ford wants to meet.

Commitment to the Kentucky plant

In fact, back in 2010, the carmaker invested $600 million in the Louisville plant, with financial support from the state of Kentucky, to be able to more effectively shift production from vehicle to vehicle, depending on consumer demand. The plant has been in operation since 1955.

What’s ultimately going on here is that Ford wants to adjust its product mix in the US, building fewer slow-selling small cars in the US and introducing new pickups and SUVs, vehicles that the market is hungry for right now and that can bring in higher profits.

Ford Escape Sync 3Matthew DeBord/Business InsiderThe Ford Escape crossover.

The game plan is to shift small-passenger-car production to Mexico, to a new plant. It’s worth noting that Ford isn’t breaking new ground south of the border; the automaker opened its first Mexican plant in the mid-1960s and established a second during the Reagan administration.

The current US workforce will be reoriented to build more trucks and SUVs. If punitive tariffs were enacted, as Trump has proposed, on vehicles entering the US from Ford’s Mexican plants, then Ford would have to consider discontinuing small-car production amid current market conditions.

This would be bad, as Ford needs the small vehicles in its lineup both to meet federal fuel-economy regulations and to hedge against future increases in gas prices and changing market conditions.

Factories everywhere

Now, you could ask why Ford doesn’t just keep all vehicle production in the US (as if it ever has — Ford operates factories all over the world and has for decades). The problem is that it can’t make enough money on smaller vehicles to justify devoting manufacturing capacity to them at the moment, or adding new capacity — but it can repurpose that capacity to build the more profitable vehicles that consumers want.

Ford — and for that matter the rest of the industry — doesn’t want to add new capacity because the US market is at a sales peak. Building new factories now would mean idled factories later, when the market inevitably declines.

All of this enables Ford to do a better job of taking care of its existing and retired workforce. As the company continues to post good financial results quarter after quarter, it can share the wealth: earlier this year, the automaker and United Auto Workers announced that workers would get $9,300 apiece in profit-sharing payouts.

Profits also enable Ford to keep its pension plans nearly fully funded, making for a better overall balance sheet.

Bill FordWilliam Thomas Cain/GettyFord Chairman Bill Ford.

Ford and the political football

The bottom line here is that Ford has ended up on the short end of a debate about jobs, at a time when the last thing the automaker is contemplating is long-term layoffs or plant closures. If Ford were planning to move significant truck production to Mexico, then there might be something going on with the carmaker using NAFTA to lower its labour costs — a move that would rile up the UAW in a major way.

That hasn’t happened, so what Trump is suggesting here — in as much as 120 characters can suggest something meaningful — is that his cordial businessman’s relationship with Bill Ford has convinced Ford to “keep” jobs in the US that it didn’t intend to get rid of.

Instead, Ford looks set to keep production in the US that it was considering shifting to Mexico.

Weirdly, that’s a sort of win-win and could signal the end of a war of words between Trump and Ford that escalated during the campaign. (For what it’s worth, Trump and Bill Ford has reportedly been discussing these issues since before the election.)

Unfortunately, the dustup also shows that the president-elect doesn’t yet have a very strong understanding of an industry that’s one of the most important drivers of the entire US economy.

NOW WATCH: Ford CEO responds to Trump’s criticism of the company

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