Trump vs. the Auto Industry: Political Theater or Gathering Storm?
In the scrum leading up to his inauguration, President-elect Donald Trump has seemingly spent a lot of time thinking about the auto industry. He made Ford’s Mexican plants a major issue on the campaign trail, and in the past month has angrily tweeted at GM and Toyota over their investments south of the border, with one message alone causing the latter to lose over $1 billion in value in five minutes. Whatever your opinion on the man, it’s safe to say he’s not afraid to tell you what he thinks at any given moment — even if it contradicts something he’s already said. Trump has billed himself as the pro-business president, but businesses (and economies as a whole) require some kind of stability to thrive. So far, he’s delivered the exact opposite.
Most politicians have a consistent record that goes back decades. Trump, a first time office-holder, does not. What he has said on record about the auto industry has been wildly inconsistent, and that has a lot of people worried. Trump was enthusiastically for the 2008-2010 federal bailout of the auto industry, though before he was against it, and before he was both for and against it. In 2008, he sided with President-elect Barack Obama, telling CNBC: “You have to save the car industry in this country. General Motors can be great again. Ford can be great again. And Chrysler could be great.” Later, he told Fox Business anchor Neil Cavuto: “I think the government should stand behind them 100 percent. You cannot lose the auto companies. They’re great. They make wonderful products.” By 2012, the then-reality TV star railed against the bailout several times on Twitter, accusing Obama of bungling the deal:
Obama is a terrible negotiator. He bails out Chrysler and now Chrysler wants to send all Jeep manufacturing to China — and will!
— Donald J. Trump (@realDonaldTrump) November 1, 2012
To which Ralph Gilles, chief designer of Fiat Chrysler Automobiles replied:
@realDonaldTrump you are full of shit!
— Ralph Gilles (@RalphGilles) November 1, 2012
The frustration is understandable. Just two years after the bailout ended, the industry was already sharply on the rebound. By 2014, the federal government had gotten its back $426 billion “investment” back from the TARP program (which included the auto bailout), along with an additional $15.35 billion in profit. In 2017, the American auto industry has logged its record-setting seventh straight year of growth, and with 17.53 million cars sold in 2016 alone. Today, the Great Recession seems like a distant memory in Detroit. Even on the campaign trail, Trump was seemingly unable to completely write the bailout off. According to The Washington Post, he told a Michigan crowd in 2015:
You could have let it go, and rebuilt itself, through the free enterprise system. … You could have let it go bankrupt, frankly, and rebuilt itself, and a lot of people felt it should happen. Or you could have done it the way it went. I could have done it either way. Either way would have been acceptable. I think you would have wound up in the same place.
While most auto execs have been more tactful than Gilles, there’s palpable concern in the Motor City right now. For nearly two years, Trump has assailed Detroit as both the key to, and a major obstacle of, job creation in America, using the industry as a cudgel to attack the North American Free Trade Agreement.
At best, Trump’s statements so far reflect a grossly oversimplified view of the American automotive industry. It’s easy to think of it as a monolithic, three-headed beast: Ford, GM, and Fiat Chrysler. But in reality, it’s made up of numerous multinational manufacturers scattered across the country. In turn, The Big Three have interests all over the world. Forcing American companies to abandon billions in plants, trained workers, and infrastructure could have a devastating effect on the American economy. It’s a move that Trump as a businessman has vocally refused to do with his own companies.
“I need clarity. I think we all need clarity,” FCA chairman Sergio Marchionne told The Detroit Free Press at this year’s North American International Auto Show. “And we are not the only ones that need clarity.” If you include suppliers, distributors, dealers, and other ancillary businesses, the auto industry employs millions of Americans, with high concentrations in the midwestern states that went for Trump this election. Times may be good right now, but the last thing these companies, plants, and local economies need is another crisis. Remember: It was less than a decade ago that Detroit seemed on the verge of collapse, and threatened to take the American economy down with it.
On December 4, Trump wrote a number of tweets proposing a 35% tariff on “any business that leaves our country,” including cars. It was great political theater, and a strong nod to his base. But GM has already committed $5 billion through 2018 for manufacturing in Mexico, including the plant where the all-new GMC Terrain will be built. Fiat Chrysler has recently spent $850 million in Mexico for Jeep Compass production, and Mark Fields, president of Ford, has said that the company’s Mexican operation is essential to the company, citing that it’s “been in Mexico for over 90 years.”
Still, automakers are hedging their bets against the any scenario. At the Terrain launch, GM CEO Mary Barra outlined the company’s recent American investments: “We have more than 40 manufacturing facilities in the U.S. and over the last two years alone, we have invested more than $11 billion creating thousands of new jobs in the U.S., as well as recruiting technical talent.” Fields said Ford expects “… a more favorable U.S. manufacturing business environment” under Trump, but affirmed that the company will remain multinational.
Presidents-elect have little power aside from the bully pulpit, and Trump has wielded it more than any in recent history. He seems to take the title literally; many of his tweets are thinly-veiled versions of threats, and they’re only getting more pointed. Take this:
General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!
— Donald J. Trump (@realDonaldTrump) January 3, 2017
Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.
— Donald J. Trump (@realDonaldTrump) January 5, 2017
There’s really no way to read this other than: “If you do this, I will make sure you regret it.” There’s little precedent to this kind of behavior from a president; what’s more, both the Chevy and Toyota accusations proved to be factually inaccurate. Thanks to a complex series of laws, Trump can use the power of the presidency to impose some tariffs against entire industries (mind you, not individual companies), but the power is still largely relegated to Congress. Using his platform to manipulate the market against individual corporations is at best unethical, to say nothing of the risks he’s taking to make these statements without fact-checking. Worst case scenario, it’s a troubling preview of, in the words of Sarah Palin, a new era of crony capitalism.
Nonetheless, in the wake of Trump’s statements, Ford announced that it canceled plans to build a $1.6 billion plant in Mexico, instead opting to invest $700 million in existing Michigan facilities. While Fields said the move is “a vote of confidence” in Trump, he made it clear that declining small car sales and shrinking profit margins were the motivating factors behind the decision. FCA reiterated that it will set aside $1 billion to update its Warren and Toledo plants (also projects that stretch back several years), and Trump publicly urged GM to come up with a plan at his recent press conference. After being the target of another Trump tweet, Toyota announced that it would invest $10 billion over the next five years in the U.S. It won’t, however, stop its work on a new plant in Apaseo el Grande. Aside from Ford’s cancellation of its San Luis Potosi plant, in fact, automakers won’t be pulling out of Mexico anytime soon. There’s good reason for that.
For the past few decades, automakers have largely focused on small car production in Mexico, which builds 45% of the compacts sold in America. The logic behind the current model has been simple: Keep high-profit vehicle production in the U.S., and low-profit vehicle production in Mexico. Why? Because profits are greater in a plant where workers make $8 to $10 an hour as opposed to the $48-$58 negotiated by the U.A.W. Moving production of say, the Ford Fiesta, back to the U.S. would add thousands to the sticker price, placing it out of reach of the market it appeals to.
In the 23 years since the passage of NAFTA, the American auto industry has invested more and more in Mexico and Canada. Between 2010 through the end of the decade, the Mexican auto industry is expected to double in size. It’s currently the seventh largest auto-producing country in the world, with manufacturers from the U.S., Japan, South Korea, and Germany all building cars there. In 2016, roughly 3.8 million Mexican-built cars were imported to the U.S., accounting for roughly 25% of auto sales. Around 2.1 million were imported from Canada. Both pale in comparison to U.S. production, which totaled roughly 12 million vehicles last year.
According to the Center for Automotive Research, moving just Mexican production to the U.S. would add millions of vehicles to a production chain that’s already operating at 94% capacity, and bring only 22,000 new jobs to the field — or roughly 20% of jobs created in December 2016 alone, which was considered a sluggish month. For those new jobs, it could potentially cost automakers $4.7 to $6.5 billion just to build new plants. If Mexican imports were choked off altogether, American suppliers would need to find a way to make up $22.5 billion annually.
Then there’s Trump’s threatened tariff. Currently, the average price for a new car is around $35,000, the highest it’s ever been. If that median car was hit with the 35% tariff on Mexican-built goods, its price would skyrocket to $47,250. A base-model Mexican-built Terrain (based on 2016 prices) would jump from $24,070 to $32,494. The cheapest car in America, the Mexican-built Nissan Versa S, would jump from $12,855 to $17,354. Nissan, which has been manufacturing in Mexico for over 50 years, and sells over 800,000 Mexican-built cars a year in the U.S., could lose over 25% of its sales overnight. Mazda could lose upwards of 30%.
And there’s China. Trump’s proposed 45% tariff on goods from China means the imported Buick Envision would jump from a $34,065 base price to $49,394. And China has signaled that it will go “tit-for-tat” against any newly imposed sanctions. Considering that it’s the world’s largest auto market, that would also have serious implications for the American auto industry. In an op-ed, China’s Global Times, an official Communist Party newspaper, declared that in the event of tariffs: “A batch of (U.S.) Boeing orders will be replaced by (Europe’s) Airbus … U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted.” With the risk of a trade war made very real by Trump’s aggressive stance on NAFTA, Joshua Meltzer of the Brookings Institute told Fox News: “A lot of us are hoping that his overriding need to grow the economy and create jobs will soften and mitigate some of the more harmful actions he could take on the trade front.”
Finally, there’s the elephant in the room, which is the rise of the machines. Again, The Detroit Free Press:
While just about everyone wants to encourage manufacturing in the U.S., the center’s researchers also found that 87% of U.S. manufacturing job losses are due to technology or automation. Those automakers who increase manufacturing employment, even by turning to low-wage countries, also create more high-wage jobs, primarily in the U.S., for engineering, research, product development and software.
Curiously, aside from a pledge to “bring jobs back,” to former auto industry strongholds, Trump has said nothing about curbing the increase of automation in any field.
As it stands, Trump has presented us with two options: 1) A massive price hike for cars, and economic upheaval as profits evaporate, and automakers are forced to abandon billions of dollars of facilities, workers, and infrastructure, or 2) Automakers attempt to weather the storm, raise prices to reflect new tariffs, and deal with the consequences as most affordable new cars are priced out of the average American’s budget.
On top of all the strife, there are a number of stress cracks already starting to show in the auto market, despite dizzying sales numbers. In 2016, most automakers used aggressive incentives to keep customers happy, and with tried-and-true segments like compact cars and midsize sedans on the decline, companies are scrambling to shift product lines to offer more competitive models. And while gas prices remain low, history has shown us that it’s unwise to expect them to stay that way forever. Cheap gas, a low-ish unemployment rate (4.7% as of December 2016), and aggressive incentives are all contributing to the foundation that these record-setting sales numbers are built on. But with all-time high prices, sales already cooling, factories slowing production to reflect demand, the industry’s strength is beginning to look like a house of cards.
And of course, there’s Trump’s personally tenuous relationship with the “Made in the U.S.A” label. In 2005, he wrote a piece for Trump University’s blog called “Outsourcing Creates Jobs in the Long Run,” where he argues:
We hear terrible things about outsourcing jobs–how sending work outside of our companies is contributing to the demise of American businesses. But in this instance I have to take the unpopular stance that it is not always a terrible thing.
I know that doesn’t make it any easier for people whose jobs have been outsourced overseas, but if a company’s only means of survival is by farming jobs outside its walls, then sometimes it’s a necessary step. The other option might be to close its doors for good.
More recently, he told George Stephanopoulos of ABC News’ This Week, “They don’t even make this stuff here” when pressed on why none of his branded products are made in the U.S. And while Trump found traction with the “bring jobs back” pledge in the Rust Belt, Coal Belt, and other economically depressed areas of the country, his call for a boycott of Macy’s after its decision to discontinue his clothing line, and his supporters subsequent enthusiasm for the company’s recent 10,100 layoffs (more than the “saved” jobs at the Indiana Carrier plant, and the auto industry’s recent pledges combined), seem to suggest that the Trump Administration could actively disrupt the economy for political reasons, regardless of its effect on the livelihood of Americans.
So to echo Sergio Marchionne: We need clarity. The automotive industry has been thriving of late, but Trump’s obtuse positions threaten to undermine all the progress that has been made since the Great Recession. And that doesn’t just hurt business, it would affect millions of Americans. The president-elect has talked a tough game on the auto industry, but his level of meddling is already unprecedented, and seems completely anathema to the principles of his party. We’d be thrilled to see more job growth in the American automotive sector. But until Trump proves he can walk the walk, we remain skeptical that his posturing will do much good in the short or long term.