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Why Fiat Chrysler Won't Make Cars in the U.S. Anymore

By John Rosevear – Sep 17, 2015 at 5:23PM

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Reports say that FCA's new contract with the UAW includes a radical change: FCA's U.S. factories will focus on trucks and Jeeps. The cars it currently makes in the U.S. will be shifted to factories in Mexico instead.

Production of the Chrysler 200 sedan, currently made in Michigan, could move to Mexico under a radical plan to reshuffle FCA's U.S. manufacturing. Source: Fiat Chrysler.

Details of Fiat Chrysler's (FCAU) tentative new labor contract are starting to leak out -- and it looks like some big changes are in store for FCA's U.S. factories.

FCA and the United Auto Workers announced on Tuesday night that they had reached tentative agreement on a new contract for the roughly 36,000 FCA employees represented by the union. The agreement is "tentative" because those workers have yet to vote to accept it. Full details of the agreement won't be released until after it has been presented to workers. 

But the details that have leaked so far suggest that FCA CEO Sergio Marchionne has made a dramatic decision to rearrange the company's manufacturing in North America -- one that could work to the union's advantage.

FCA will no longer make cars in the U.S., but that's OK
Here's the gist of the changes: FCA is no longer going to make cars in the United States.

Right now, FCA makes a mix of cars and trucks in the United States and others in Canada and Mexico. Cars, generally speaking, generate less profit per sale than do pickup trucks and SUVs. But FCA's U.S. factories cost more to operate than do its plants in Mexico.

According to a report by the Detroit Free Press, that mix of products is about to be overhauled. Production of the Chrysler 200 and Dodge Dart sedans will move from Michigan and Illinois, respectively, to Mexico. An upcoming crossover SUV that will replace the Jeep Compass and Patriot, currently made in Illinois, will also be made in Mexico.

But those plants won't be closed. Instead, production of FCA's SUVs and Ram pickups will be shuffled over the next few years to give each of its U.S. plants a high-volume set of products to build. 

In some cases, the factory shuffles will give FCA much-needed additional production capacity. For instance, right now the Jeep Cherokee and Wrangler are made on two separate assembly lines at a factory in Toledo. Both are maxed out, and with the market for FCA's SUVs white-hot, dealers would love to have more of each to sell.

Under the plan, production of the hot-selling Cherokee will move to the Illinois plant that currently makes the Dart, Compass, and Patriot. The Wrangler will stay in Toledo, but production capacity for the iconic Jeep will be increased -- and a new Wrangler-based pickup will be added in hopes of filling out the remaining capacity.

Similar changes are in store for several other hot-selling FCA trucks and SUVs. The hoped-for upshot: FCA's dealers get more of the hottest products to sell, UAW-represented workers stay employed and busy, and FCA's profit margins get some help.

A typically off-the-wall-brilliant Marchionne move
This is the kind of bold reshuffling that we've come to expect from CEO Sergio Marchionne. If it works, it's a win-win: FCA's most costly plants will be used to make its most profitable products, while less profitable sedans are moved to less costly Mexican facilities. That should help boost FCA's profit margins in North America, an urgent priority for Marchionne.

At the same time, the union gets to preserve jobs -- in fact, some of these factories may end up adding shifts in time. The plan's product commitments add up to over $5.3 billion in investments over the next four years. That's money that both sides can say is being spent to preserve American manufacturing jobs.

Of course, it's not official until workers vote to accept the new contract. That will happen over the next few weeks. We don't know all of the details of the new plan yet, and right now it's unclear how FCA's Canadian factories (which make both cars and trucks) factor into the plan. But it sounds like the kind of thing we've come to expect from Marchionne. If it works, it should give FCA's bottom line a much-needed boost.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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