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Where Trump Gets Economic Freedom and the Auto Industry Wrong

January 4, 2017

 

 

There is great anticipation that soon-to-be President Donald Trump will embrace pro-growth policies, however his tendency to politicize allocation of capital is still worrisome. This is contradicting the key conservative principle of economic freedom, the free movement of capital to where they are most productive.

 

Mr. Trump’s inclination to selectively target U.S companies and how they invest capital also violates the principle of limited government. It would have been more welcoming news if Carrier’s decision a few months ago to not relocate hundreds of jobs to Mexico, or where Ford decides to builds certain cars, were not influenced by the public relations impact to their stocks and brand due the President-elect questioning the morality of their economic decisions.

 

Such intrusion by an incoming Presidency or the expanded enforcement bureaucracy that normally accompanies it, speaks of an expansion of unlimited government rather than a limited one. Big government is often counter productive to the growth potential of individual businesses because it is out of touch or lack of knowledge about the volatility of dynamic trends and opportunities unique to the operational survival of different industries or companies. As a result it influences capital to move to unproductive political ends or not to move at all. Conversely, limited government is productive to growth and jobs because it allows the conditions for capital to be moved by the people who have the most knowledgeable experience to make it more productive.

 

While being a political analyst I have also been in the auto industry for 17 years and have witnessed how trickle down big government intrusions especially through the EPA or alliances to big labor have affected the productivity of the industry, the products themselves and customers. Mr. Trump’s targeting of Ford and more recently General Motors has particularly drawn my attention, especially because it relates to the effects of economic freedom and limited government.

 

Mr. Trump has threatened that going forward companies would no longer move production out of the U.S anymore without consequences and may be slapped with a 35% tariff for importing goods from countries with lower labor costs. He has also chastised and threatened General Motors for importing the very low volume hatchback version of its Chevy Cruze from Mexico. In 2016 Mexican built hatchbacks sold in the U.S numbered about 4500, while the sedan versions sold were over 185,000, and built in the Lordstown Ohio plant.  

 

“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!” Mr. Trump said on Twitter. This sounds like what a socialist President Bernie Sanders would have said.

 

GM pointed out in response to Mr. Trump’s tweet that all Cruze sedans sold in the U.S are built in Ohio, but the hatchback versions which are made in Mexico are primarily for the Mexican but built along with a smaller number that are made for the U.S market. Like Ford, GM is a global company with operations worldwide that caters to individual markets. Similarly, foreign car companies such as Toyota, Nissan, Volkswagon, BMW and Mercedes Benz produce cars in the U.S for the American market and for export. They also hire hundreds of Americans and invest millions here. As a businessman Mr. Trump should be able to relate to a global economy.

 

Mr. Trump had criticized Ford’s original decision to move its Focus compact car production from Michigan to a new plant in Mexico, even though the company’s CEO Mark Fields had said this action was not expected to result in job losses in the U.S, because Ford would be using the Michigan assembly plant capacity for new profitable products. Mr. Trump and other critics who had opposed this move may have reaped political points for doing so, but it indicates ignorance to an industry or market trend they may not be familiar with, as they try to influence the unproductive allocation of private capital by a large global companies like Ford, GM and others. Ford has since scrapped plans to build the new plant in Mexico and will instead use excess capacity in existing plants there to build the Ford Focus while it invests over $700 million in new plants in Michigan for new products

 

One of the main reasons why some auto manufacturers have shifted production of its compact cars to Mexico is because of the expensive fuel efficiency standards mandated by the EPA that makes the cars less profitable to produce in the U.S. Japanese carmaker Mazda produces its compact Mazda 3 in Mexico for the North American market and even some other smaller Mazdas rebadged as Toyotas.

 

In addition, these bureaucratic mandates are often based on ideological preferences rather than grounded in technological and economical viability to achieve them. This includes the current mandate which the Obama administration is trying to finalize which requires a fleet wide average mandate of 54.5 mpg by 2025, which reflects a 50% increase from today. Various manufacturers in trying to meet previous EPA mandates have experienced more expensive development costs while seeing rushed technologies suffer reliability issues which in turn affects customer loyalty. Some of these technologies include some CVT (continuously variable transmissions), multiple speed transmissions, fuel delivery and exhaust systems, and engine electronics. Some manufactures have even dropped the availability of spare tires to save weight to help meet EPA standards.

 

Similar issues plagued the heavy-duty trucking industry and especially owner operators when EPA mandates and federal regulations in the early 2000s. The results were more expensive and unreliable diesel engines that often delivered worse fuel mileage than the older and proven reliable engines. In addition, it sharply drove up the development costs of new engines and trucks, which led to mergers and acquisitions in the heavy truck industry and some leaving the market completely. For example longtime heavy equipment and truck engine supplier Caterpillar no longer supplies engines to the trucking industry.

 

There may be other economic and market reasons for Ford’s decision on the Focus production and GM on the Chevy Cruze. Compact car sales have steadily fallen in the U.S as the market share and demand for compact utility vehicles (CUVs), sport utility vehicles (SUVs) and light trucks have steadily risen. Fiat/Chrysler has decided to stop producing and selling mid size and small cars in the U.S market. It will instead redirect capacity to produce more CUVs, SUVs and light trucks. Relatively low fuel prices in the U.S also help make them more affordable to own, compared to the most of rest of the world (such as Latin America) where higher fuel prices and economic conditions make compact cars more popular. Like GM, VW, and others, if Ford produces the compact Focus in Mexico, the car will also be produced closer to a market that favors small cars.

 

CUVs and SUVs also have a large market in the U.S because they may be also cheaper here than many other countries where there are taxes and/or tariffs imposed on the engine size of vehicles or the vehicle type themselves. This also influences the disproportion of the market in other countries towards small cars compared to larger CUVs that may have larger engines. For example, Ford slightly reduced one of the engine options size of both the compact Escape CUV and midsize Fusion sedan from 1.6 liters to 1.5 liters that it sells in multiple markets because in some countries engines with 1.6 liters or above attract higher taxes/tariffs.

 

American market preferences have shifted to favor CUVs and trucks especially with the option for all wheel drive, which also offer the utility and space formerly attributed to station wagons and mini-vans. Part of this is due to competition and innovation in the auto industry over the last 30 or so years. Some are able to exceed or the meet fuel efficiency of small cars introduced 10 or 20 years ago. While many liberals may make it seem that better fuel economy could only have been achieved due to government mandates, the reality is that competition will win every time to allocate capital investments to better and more efficient products.

 

In addition, the popularity of leasing in the U.S especially in the major markets such as the North East, Florida and California often allows customers the opportunity to afford the payments on larger midsize cars like Ford’s own Fusion and Escape CUV. In many cases with a lease a mid size car or CUV may even be cheaper or not cost much more than a compact car thus making the smaller car less desirable. Many customers like leasing because it allows them to drive more modern and reliable cars with the latest technologies. It also gives them flexibility if their lifestyle changes in a few years. This customer preference also gives car companies the opportunity to sell the same customer a vehicle very two or three years versus five or more if they had bought the car.

 

Mr. Trump should focus his influence on where he can make a positive difference, tax and regulatory reforms that promote economic freedom, and a better business environment for both American and foreign companies to invest in the U.S. By doing so he will benefit politically, auto companies will build affordable cars customers want to drive, and the country will experience the growth it has been lacking for years.

 

 

 

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