New political realities emerge as Ford drops Mexico plan

Ford Motor Company’s decision to shelve its plans for a new facility in Mexico and focus instead on the US has been the talking point within the auto industry circles.

It is also a clear message that politics has ruled over economics since this is precisely what President-elect, Donald Trump, had wanted from American automakers. Earlier this week, he had tweeted that General Motors was still selling its Mexico-made Chevy Cruze in the US. “Make in USA or pay big border tax,” was his message.

Going forward, if the Trump administration decides to take a relook at the North American Free Trade Agreement (NAFTA), which allows tariff-free flow of goods between the US, Mexico and Canada, there could be some unpleasant surprises in store. Should fresh duties be slapped on cars being imported to the US, it may be a big blow to manufacturers operating out of Mexico.

One of the recent entrants to Mexico is Kia Motors whose plant was inaugurated in September last year. Nearly 80 per cent of its production will be shipped overseas, largely to Latin America and the US. Mexico is also home to other big brands such as GM, Ford, Fiat Chrysler, Volkswagen, Renault-Nissan, Honda, BMW and Toyota. It is also tipped to be among the top five automobile market in the world by the end of this decade, a list that includes China, the US, India and Germany.

The Ford move on Mexico is disturbing since it reflects a new global order where protectionism is the name of the game. This could have serious implications for companies across the world which are keen on expanding their presence in the West. “If the US and Europe decide to look more inwards, it could have serious consequences for international trade,” says an industry observer.

For the moment, the US tirade seems to be focused on Mexico alone but it is also no secret that there have been some political tensions brewing with China too. This has apparently had a fallout with recent reports suggesting that an American automaker in China would be penalised for monopolistic behaviour. Companies like GM are among the biggest players in the country with successful Chinese alliances like SAIC Motor Corp. Ford, likewise, is betting big on China for its next phase of growth.

There is little possibility of upsetting the Chinese applecart given the high stakes involved but clearly the automotive world is in a different place today, thanks to rapidly changing political sentiments sweeping Europe. Whoever would have thought a couple of years ago that Britain would exit the EU? Now that it has happened, it did give the jitters to companies such as Jaguar Land Rover and Nissan, which are suddenly facing the prospects of the EU slapping import duties on cars shipped out of the UK. Nothing is happening for the moment and Nissan was apparently given reassurances that there was nothing to worry about, at least for now.

The threat of right-wing politics is now real and poses a threat to the idea of a unified Europe. Be it France, Germany, Hungary or Austria, the mood is distinctly changing and the fear is that more countries will follow the UK example and set out on their own without the EU’s umbilical chord. Needless to add, this will be a big blow to carmakers’ plans though, in all fairness, such a grim scenario is extremely unlikely.

Beyond political uncertainties, economic volatility has also been another issue to contend with. Till a couple of years back, Brazil was the best thing that happened in the global automobile arena, which prompted companies like JLR to plan new facilities there. The economy then collapsed but manufacturing plans could not be changed as companies revised their roadmaps for Brazil. Likewise, Russia’s fortunes have taken a nosedive that have affected exports but things seem to be gradually improving lately.

How will a more protectionist American automobile industry affect India, which is on its way to becoming the world’s third largest car producer by 2020? The truth is that neither GM nor Ford has a large market presence here. The former is keen on closing its Gujarat plant and focusing on operations in Pune. It is also not likely to make any big ticket investments in the short-term.

In the case of Ford, it recently commissioned a second plant in India but is clearly more keen on the mobility solutions space where it has invested in the Bengaluru-based Zoomcar. Its One Ford plan clearly envisages India playing a global role for small cars but will all this change with the new political administration?

India also has its own set of issues to grapple with in the coming years, which could have implications for its auto industry. While the recent demonetisation move was a bit of a shocker, there are other challenges to grapple with like the implementation of stiffer emission norms in 2020 as well as the Goods and Services Tax regime. Whether rapid growth will still continue in this backdrop is the million dollar question. A potential superpower in automobiles just cannot afford to mess up the script.