Donald Trump will be inaugurated as the 45th President of the United States on Friday, and as the chief executive, he’s put the restoration of American manufacturing at the top of his agenda.
The crown jewel of US manufacturing is and always has been the auto industry. But the industry has become extensively global, a process that’s actually nothing new for carmakers.
General Motors has had its Opel division in Europe since before World War II. Countless Europeans grew up with small Ford cars in their streets. The Japanese and German automakers have been building cars in US factories for decades.
The management of vast, worldwide manufacturing operations means that car companies can shift around the point of origin for their vehicles, based on demand. This is the practice the Trump has waded into, as he’s assailed automakers for changing the way they do business in the US, the world’s most competitive car market.
A changing market
Profits in the booming US market are with SUVs and trucks; small cars have plummeted in popularity. So numerous carmakers want to move small production to regions where labour costs are lower — not so they can screw US workers out of jobs, but so they can use their US workforce to build high-margin vehicles, while not discontinuing their less profitable cars.
The real difficulty here is that the US market, after booming for several years, is reaching the upper limit of demand growth. The fact that there are still a lot of old cars on the road means that US sales will probably remain high by historical standards for a while, and Trump’s economic policies could juke demand a bit further on the consumer side.
Yet, while sales could get a boost from last year’s record of 17.55-million vehicles, carmakers are reluctant to build new plants or add jobs in the US now, for fear that they will be stuck with idle capacity and layoffs when the downturn inevitably does arrive.
Industry executives are also mindful that they need to figure out how to grow their businesses in the event of the US downturn.
Globally, that means investing in China instead of the US.
Big in China
China’s auto market is already bigger than the US market, with about 20 million annual sales. It could grow to 40 million. In any case, it’s where the major future growth in auto sales will be.
Ford, General Motors, and Fiat Chrysler Automobiles all want in on that action. A river of investment will flow in the direction of China — and a river already has. But this means partnering with Chinese industry: a US automaker can only make and sell vehicles in China through a joint venture with a Chinese company.
In practice, this also means that US car companies can use their foreign manufacturing capacity to quickly satisfy US demand. For example, Buick is a hugely popular brand in China. So when General Motors needed to capture some crossover SUV demand for the brand in the US, it could import a Chinese-made Buick, the Envision.
Since imports began in mid-2016, sales heave steadily climbed, hitting almost 4,000 vehicles in December.
For the record, the United Auto Workers wasn’t happy about this move. But if GM had adjusted US manufacturing to build the Envision, it could have lost over 10,000 highly profitable sales in 2016. To make matters worse, GM might have also had to shift production around, with the understanding that shifting passenger-car production to Mexico or even Canada was a non-starter thanks to Trump’s “America First” politics.
For automakers, no choice
Capacity expansion isn’t going to happen in any meaningful way in the US. But it is, and must, happen in China. US automakers — not to mention the Volkswagens, BMWs, Toyotas, and the Mercedes of the world — literally have no choice about this. Taking a pass on a piece of 20 million in potential future vehicle sales would be reckless business.
I know what you’re thinking: Why not build the Chinese-market vehicles here and export them, addressing the trade imbalances in the process?
That adds too many logistical and cost layers to the system. For a huge part of the 20th century, carmakers established that building cars where you sell them is the optimal arrangement. And to use a 21st-century example, Tesla would very much like to set up a joint venture in China to make its cars, rather than having to deal with the headaches of exporting them from California, as it now does.
There’s a good chance that Trump will fixate on this. If Ford, GM, and FCA all built new plants in the US, thousands of jobs in states that went for Trump would be created. That additional capacity could also add to GDP growth.
But it would be very high-risk capacity, given that there isn’t adequate future demand in the US market to support it.
So if you think it through, you can see how an unlikely short-term win for Trump — new factories and new jobs in the US — could at least in the car business become a long-term liability: massive layoffs and an idled plant in Ohio or Michigan when the downturn arrives, probably … right around the time the 2020 election cycle is starting up, given the probable dynamics of the current auto market in the US.
The automakers already know how to deal with the financial impact of the US downturn: grow their market share in China (as well as in other global markets). That wise analysis of their future balance sheets isn’t going to sit well, however, with President Trump.
NOW WATCH: Ford just revealed some of the first production versions of its most expensive supercar — the Ford GT
Business Insider Emails & Alerts
Site highlights each day to your inbox.