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Why Is Ford’s Small Car Production Moving to Mexico?

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Ford Motor Company

Previously, we discussed how Ford’s (F) plan to shift its small car manufacturing to Mexico attracted controversy. Presidential candidate Donald Trump has been critical of Ford’s plan. However, Ford responded in a positive manner. The company explained that it isn’t going to result in any job cuts in the US. Now, let’s find out why Ford plans to move its small car production to Mexico.

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Ford stood firm during the economic crisis

Ford started its journey in the automotive business in the US more than a century ago. The company is known for its innovation—like the moving assembly line to make vehicles affordable for common people.

The company survived the worst economic times in US history. When its closest peers such as General Motors (GM) had to file bankruptcy and Chrysler had to merge itself with Italian auto giant Fiat S.p.A. to survive, Ford didn’t need any outside financial help. If Ford hadn’t taken steps to improve its manufacturing efficacies and cut its costs during tough times, it likely would have experienced the same financial mess as its peers.

One of the key strategies that kept Ford going is the “One Ford” plan. The plan helped Ford remain financially sound during the 2009–2010 auto industry crisis. With this strategy, the company saved money by taking cost-cutting measures on many fronts and focusing on higher profitability. These measures included changes in product mix, development of customer-oriented products, and focus on balance sheet improvement.

Why is Ford moving?

Ford’s plans to invest in Mexico are part of this strategy too. The move will likely reduce its costs by improving manufacturing efficiency and reducing labor costs. As we noted earlier in this series, small cars tend to have lower profitability for automakers compared to larger vehicles. Shifting vehicle assembly to Mexico is going to reduce Ford’s labor costs. It will help the company compete with other market players in the US. At the same time, it will keep the company financially sound.

Currently, all mainstream automakers (XLY), including General Motors (GM), Fiat Chrysler (FCAU), and Toyota (TM), have been struggling to protect their margins from small cars in the US.

Last year, Ford also shifted the production of its medium-duty trucks from Mexico to its assembly plant in Ohio. In the next part, we’ll discuss how these trucks are doing in fiscal 2016.

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