Trump's deal with automakers is completely lopsided

Donald Trump considers himself a dealmaker of the highest order, but in the short period since he won the presidential election and took office, he’s already been out-dealt by the major US automakers.

The CEOs of General Motors, Ford, and Fiat Chrysler Automobiles journeyed to the White House on Tuesday to meet with Trump and process his demand that the carmakers build factories and hire workers.

But the automakers probably aren’t going to build any additional factories, and they’re unlikely to go on a hiring spree. The US market for new-vehicle sales has been booming for years, but after a record year, with 17.55 million cars and trucks sold, it appears to be levelling off ahead of a standard issue cyclical downturn.

In that environment, the automakers don’t want to add any additional manufacturing capacity.

But Trump wants headlines, and the automakers are more than happy to give them to him: an investment in an existing factory here, adding workers to existing shifts there. But when it comes to big business moves, they’re looking after their balance sheets. GM just laid off 1,200 workers at its plant in Lordstown, OH — smack in the middle of Trump country — because it doesn’t need three shifts building an increasingly unpopular small sedan, the Chevy Cruze.

Meanwhile, Trump is giving the Big Three — and for that matter, the Japanese, German, and South Korean car companies that also manufacture in the US — the moon and the stars.

Give the carmakers what they want

By stating that environmental regulations have gotten out of hand in the Tuesday meeting, he as much as reassured the automakers that they will be getting a break on more stringent emissions and fuel-economy regulations, music to the automakers’ ears as they continue to sell a lot of profitable pickups and SUVs and would like to back away from smaller, more fuel-efficient vehicles.

Ford’s leadership has been vocal on this front, stating repeatedly that a review process between the automakers and the government over higher Corporate Average Fuel Economy (CAFE) standards was “short circuited” when the EPA locked in the rules last year. Business Insider heard a unified message from the company on this score at the recent Detroit auto show.

Ford f150FordFull-size pickups like the Ford F-150 are selling well.

What about a border tax on vehicles and possibly parts imported from Mexico for sale in the US?

The industry is already assuming that this is a done deal. But it isn’t about to accept a one-tax-fits-all approach, and the expanded federal bureaucracy needed to administer such a tax will quickly become a political liability for Trump, offsetting his pledge to cut regulations by 75% and putting him on the wrong side of Republican orthodoxy.

As far as corporate tax cuts go, the industry is already assuming that it, too, is a done deal. And what many people in the car business are calling “pro-growth” policies from the Trump administration could extend the current sales boom for another 12 to 18 months, enabling the automakers to further bulk up their balance sheets ahead of a downturn.

It’s entirely possible the carmakers’ stocks will also move higher, after being stuck in the doldrums since the sales boom began. This may take pressure off the companies to do additional share buybacks or dividend increases and allow them to pile up more cash.

So in exchange for not spending billions to expand operations in Mexico, getting a big break on CAFE standards, enjoying a corporate tax cut and an extended sales boom, automakers simply have to undertake some marginal hiring and investment, ideally targeted to areas where Trump promised jobs.

This would be a massive win for the auto industry, but a terrible deal for Trump.

Joy in Detroit

Overall, the carmakers seem to be very pleased with what they’re seeing from the new administration. In retrospect, their only big concern might have been a Trump downturn after the election, but that didn’t happen — in fact, the opposite occurred, and the US market is now set to run at a record sales pace for longer than anticipated.

General Motors, Ford, and FCA were already committed to US manufacturing, given their massive factory footprint in the US. For them to edge that commitment higher with no major promises is an easy process and ironically could actually prevent them from putting too much of their profits toward incentives, a practice that has gotten them all in trouble in the past.

The so-called foreign transplants are likely more nervous than the Big Three, but the Germans and the Japanese have been building plants and hiring American workers for decades — they have just been doing it in southern states that Trump won’t have to worry about winning again in 2020.

You might say that the American people are losing out here, but they really aren’t. There won’t be massive layoffs in a downturn because there won’t be massive hiring now. And although the CAFE standards break may enrage the more environmentally minded, the industry has actually been investing heavily and successfully in lower-emitting, more fuel-efficient technologies on its own for decades, prompted by consumer demand for higher MPGs.

Even a corporate tax cut is a positive for the people, given the intense capital demands on the industry to invest in R&D. In the end, consumers will get much better cars, and possibly see self-driving vehicles far sooner than expected.

The art of the lopsided deal

Trump, however, isn’t getting much of anything. This is due to the strong state of the economy and the robust recovery in the auto industry: the carmakers can’t be hurt, only helped. The border tax is his job-creation point of leverage, but if the people across the table are just going to accept it as a fait accompli, then it isn’t a point of leverage anymore.

The bottom line is that the auto industry has already been providing a good deal to the American people: major employment; significant investment in the US; lots of taxes and economic activity, from Detroit right down to the local dealerships; a bountiful range of vehicle choices, from electric cars to huge pickups.

That’s the reward Americans are reaping for spending billions to bail the industry out in 2009.

And Trump? He’s certainly getting a deal. But it looks about as lopsided as it’s possible for a deal to be.

This is an opinion column. The thoughts expressed are those of the author.

NOW WATCH: Virtual test drives could soon let you buy your car 100% online

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.