New contracts between workers represented by the United Auto Workers (UAW) and Ford (NYSE:F) and Fiat Chrysler (NYSE:FCAU) contain provisions that might be unsettling to many Americans: Both Ford and FCA are moving the production of nearly all of their car models out of the United States.
What's this all about?
The new deals between the automakers and the UAW contain specific "product commitments," promises that certain factories will get certain future products to build. These commitments are important to workers because they give some assurance that their services will continue to be required in the future. For the rest of us, they give some insight into the automakers' thinking and future plans.
Under the deals, nearly all of Ford's and FCA's U.S. factories will get future products. But with a couple of exceptions, those products won't be cars: They'll be trucks or SUVs instead.
For instance, Ford's Michigan Assembly Plant currently makes the Focus compact and C-Max hybrid. Both of those products will be made elsewhere (probably Mexico) after 2018. But workers at Michigan Assembly can be reassured: Ford will build new products, believed to be a new Ranger pickup and Bronco SUV, at the plant.
Ford is also planning to halt U.S. production of the Fusion and Taurus sedans. The Taurus is likely to be discontinued: It's a slow seller, and it's built alongside the white-hot Ford Explorer. It's likely that Ford will use the capacity freed up by the end of Taurus production to simply make more Explorers.
The Fusion won't be discontinued, but production is likely to be centralized in Mexico. Right now, the Fusion is made in two factories, one in the U.S. and one in Mexico. The U.S. factory, which also makes the Ford Mustang, will get the new Lincoln Continental instead.
The Mustang and Continental, which wear two of Ford's most iconic nameplates, will be the only car models that Ford builds in the United States.
Similar changes are happening at FCA. Right now, the only cars that FCA makes in the U.S. are the Dodge Dart, the Chrysler 200, and the Dodge Viper. The Dart and 200 are expected to move to Mexico after 2016, and the Viper will be discontinued in 2017.
Unlike its rivals, General Motors (NYSE:GM) is expected to continue to make many of its car models in the United States. There is one possible exception: Production of the Buick Verano is expected to move out of the country. The Verano is closely related to a pair of Buicks that are strong sellers in China; it's not impossible that the next-generation Verano could be built in the same Chinese factory.
Why won't they make cars in the U.S.?
Generally speaking, SUVs and trucks generate higher profit margins than cars, and demand for SUVs in particular is very strong. That strong demand is expected to continue, and the automakers appear to be offsetting the increased costs of the new labor deals by moving their highest-profit products to their U.S. factories.
But what if gas prices rise again?
The current boom in SUV sales began long before gas prices started to fall last year. Analysts say that the boom in SUV sales is more about shifting demographics and the rise of modern, fuel-efficient car-based "crossover" SUVs than it is about cheap gas.
Translation: Demand for products like Ford's Explorer and FCA's Jeep Cherokee is likely to continue to be strong even if gas prices rise again. And if not, any needed production cuts will happen at Ford's costliest factories.
What does this mean for shareholders?
The new labor agreements give workers significant raises and bonuses over the next several years. Those will increase costs for both Ford and FCA, which could dent profit margins in their North American business units. The moves to bring higher-profit products to U.S. factories may help offset those costs.
It remains to be seen how this will ultimately play out, but in both cases the production plans appear to be well-thought-out and financially sensible. They're also good for U.S. workers -- as long as demand for trucks and SUVs continues to be strong.
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.