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Why Ford Is Planning to Make More Cars in Mexico

By John Rosevear - Feb 9, 2016 at 5:05PM

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A new report says that Ford is making a billion-dollar investment in a new Mexican factory. it's another sign that Ford is moving production of most of its cars out of the United States. Here's why that move makes good financial sense -- and why Ford's U.S. workers need not fear for their jobs.

A worker inspects a Focus sedan at Ford's Michigan Assembly Plant. The Focus is one of several Ford products that could move to Mexican factories by 2018. Image source: Ford Motor Company.

Ford (F -1.91%) is planning a series of investments that will more than double its production capacity in Mexico, according to a Wall Street Journal report

What's happening: According to the Journal's report, Ford is planning around $1 billion to build a new vehicle-assembly complex in the Mexican state of San Luis Potosi, and to expand an existing factory near Mexico City. The plants are expected to be up and running in time to add about 500,000 units of production starting in 2018.

These moves will more than double the company's existing production capacity in Mexico. Ford built about 433,000 vehicles in Mexico in 2015, representing 14% of its North American production. 

These moves haven't been confirmed by Ford. But if the Journal's report is on target, Ford will follow up a $2.5 billion investment that it announced last April in new engine and transmission plants in the Mexican states of Chihuahua and Guanajuato.

It's a big expansion of Ford's capacity south of the border. What's the Blue Oval planning?

What Ford is probably thinking: Right now -- and probably for the foreseeable future -- demand in the United States for SUVs and pickup trucks is very high, with many buyers migrating away from traditional sedan choices to car-based "crossover" SUVs. Ford, like its old Detroit rivals General Motors (GM -1.85%) and Fiat Chrysler (FCAU), is selling so many of its popular crossover SUV models that its factories are struggling to keep up with demand. Ford could almost certainly sell even more Explorers, Edges, and Escapes if it could easily make more. 

Meanwhile, its sales of sedans are slumping. The midsize Fusion is doing OK, but the small Fiesta and Focus, and big Taurus, have all seen sales decline over the last year or two. That's not just a Ford issue: Even longtime sedan king Toyota (TM 0.37%) is struggling to sell Camrys and Corollas in the U.S.

Meanwhile, a new four-year labor agreement has made the U.S. a relatively expensive place to build cars

The solution? It appears that Ford is moving most of its sedan production to Mexico so that it can use its existing U.S. facilities to make more SUVs and trucks. SUVs and trucks generally have higher profit margins than sedans, so the move makes financial sense. 

The Journal's report said that Ford would use its expanded Mexican production capacity to build a new hybrid vehicle intended to rival Toyota's Prius, as well as several other unnamed models.

Ford already makes the Fiesta and some Fusions in Mexico. It's believed that the Blue Oval will move the next-generation Focus and C-Max, currently made in Michigan, to Mexico in 2018, so that it can use the Michigan plant to make a new Ranger pickup, and an SUV. Ford is also expected to halt U.S. production of the Fusion, and to use that car's Michigan production line to manufacture the new Lincoln Continental

What this means for Ford investors: If Ford is, in fact, planning to move most of its North American sedan production to Mexico, it makes a lot of financial sense. It follows other recent moves by CEO Mark Fields that appear to be intended to boost Ford's profit margins during the next few years, including a new round of cost cuts in Europe, and Ford's announced withdrawal from the Japanese market, where it has struggled for years.

Taken together, the moves could be interpreted as girding for the next U.S. recession -- or simply, as moves to maximize the return that Ford delivers to shareholders. Either way, they're welcome.

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