Ford Motor Company (NYSE:F) confirmed on Thursday that the next generations of its Focus compact and C-Max hybrid will be built in an unspecified factory outside the United States.
The two vehicles are currently built at Ford's Michigan Assembly Plant in Wayne, Michigan. Production of the current versions of the Focus and C-Max will end in 2018.
It's a surprising time for Ford to reveal this news. Contract negotiations with the United Auto Workers are set to begin soon. Typically, Detroit automakers choose to announce positive news in the weeks leading up to contract talks.
At least on the surface, this announcement doesn't seem like a good thing for those interested in U.S. jobs. What's going on here?
Sales of the Focus have been declining for months
Ford isn't saying much -- at least not yet. We don't know for sure where the production will be going, or why. But here's what we do know.
Year to date, U.S. sales of the Focus and C-Max are both down about 16%. That's more about the market than it is about Ford. More and more buyers are choosing crossover SUVs over small and midsize sedans. (Sales of Ford's Explorer were up 30% over the same period.)
Similar shifts have been seen at most of Ford's rivals. Even Honda as posted big year-over-year sales declines for its stalwart Civic and Accord sedans (and nice increases for its crossover SUVs.)
To some extent, this shift is about lower gas prices. But it was happening even before gas prices started to drop last year, suggesting it's a generational shift in car-buying tastes.
If so, it's likely to continue for some time. Back in April, Ford said it would cut a shift at Michigan Assembly because of slow sales of the Focus and C-Max, eliminating about 700 jobs. The plant employs about 4,400 workers.
And now, Ford is saying Michigan Assembly won't be building the Focus and C-Max at all after 2018. So, are those workers headed for the unemployment lines?
The likely strategy behind this surprising move
Here's what I think is happening: I think Ford is planning to move production of the next Focus and C-Max to Mexico -- and to build something else at Michigan Assembly.
The Focus and C-Max aren't super-profitable products. Ford doesn't reveal its profit margins on specific products, but it's an open secret that its SUVs and pickups are much more profitable than its small cars. And the reduced production isn't helping: High fixed costs mean an auto factory doesn't typically break even until it's running at around 80% of capacity, as a general rule of thumb.
To maximize the profitability of those two models, Ford really needs to be running Michigan Assembly at close to full capacity -- around the clock, more or less. And right now, it isn't.
Meanwhile, some of Ford's other factories are running flat-out and having trouble keeping up with demand. I think Ford is moving the Focus elsewhere because it would like to use Michigan Assembly to build a more profitable model.
It is true that Ford will reduce costs by moving production to Mexico. Mexican workers are paid less (about $10 an hour) than their U.S. equivalents, most of whom earn between $20 and $30 an hour (with better and more expensive benefits). And Ford can scale its new production line in ways that make it profitable with lower total production.
But Mexico offers something else that's especially relevant to the Focus and C-Max, both of which are key parts of Ford's global product portfolio: It's really easy to export cars from Mexico.
Why Mexico has become a great place to build cars
Back in April, General Motors (NYSE:GM) announced that it would make the new version of its Chevrolet Cruze in Mexico.
The Cruze is a direct competitor to the Focus, but unlike Ford, with its Focus, GM is also planning to make the new Cruze in the United States. It's likely most of its Mexican-made Cruzes will be exported.
That's significant. Like a lot of other automakers, GM is attracted to Mexico because Mexico has free-trade agreements with over 40 countries. Put another way, a company that exports from Mexico has duty-free access to markets that cover about 60% of the world's economic output, according to The Wall Street Journal.
That's one reason Honda is building its Fit and HR-V in a brand-new Mexican factory: If U.S. sales should slump, the factory can easily build cars for other markets. It's one reason Toyota is shifting production of the Corolla compact (another Focus competitor) to Mexico. And its why a host of other global automakers -- and suppliers -- have joined them. That rapidly growing infrastructure has made it all the more attractive to build cars in Mexico.
And it's likely why Ford is planning to build the Focus and C-Max in Mexico. The Focus is sold in over 100 different countries. If U.S. sales of those vehicles should decline further, a Ford plant in Mexico could easily produce cars for European, Asian, or South American markets, where there's still strong demand for fuel-efficient compact cars.
There may be more unusual moves as union negotiations get going
Why announce this now, just as negotiations with the UAW are about to get rolling? There's likely some negotiating hardball going on here. I expect both Ford and GM will play up the increasing attractiveness of Mexican manufacturing as a way to push back against the UAW's hopes for wage increases. For its part, the union says it's "extremely confident" that Michigan Assembly will be building something else once the Focus and C-Max leave.
I think that confidence is not misplaced. I suspect once the dust settles, we'll find out that Ford planned all along to give the folks at Michigan Assembly something else to build in 2018, something more profitable than a Focus -- while giving itself the flexibility to export "extra" Focuses from Mexico should the need arise.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.