If incoming President Donald Trump gets his way, a subcompact car is likely to cost more in a few years.
Trump has now called out Toyota (TM) for plans to move production of its Corolla economy car from plants in Mississippi and Ontario, Canada to a new factory it’s building in Mexico. The threat, of course, came in a tweet:
This comes after Trump criticized Ford (F) for a similar plan to move production of the Focus subcompact from Michigan to Mexico, and General Motors (GM) for building a tiny number of Chevy Cruze hatchbacks in Mexico. (Most Cruze models are built in Ohio.)
Trump has clearly decided the auto industry is a fat target, since automakers have probably invested more in Mexico in recent years than any other type of company. But Trump’s attacks threaten to upend rational production plans the automakers have spent years putting into place, while also risking unintended consequences likely to harm consumers.
Higher prices for compact cars
If Trump actually managed to force automakers to move production from Mexico or other low-cost countries to the United States, there’s no way around the fact it would raise prices for car buyers. That, in turn, could reduce auto sales, which would reduce car-industry jobs. Or, it might give automakers even stronger incentives to replace workers with robots and other forms of technology, in order to keep a lid on prices and make sure they don’t lose out to other manufacturers with cost advantages.
Workers who feel harmed by the offshoring of US jobs might cheer Trump’s attacks on Big Auto, but in some important ways those attacks are misdirected. Japan-based Toyota, for instance, has invested more in US production than any other foreign automaker. It claims 10 US manufacturing facilities and 136,000 American employees. The Camry sedan is one of the most “American” cars on US roads, with an engine and transmission made in the United States and final assembly at factories in Kentucky and Indiana. The Sienna minivan is close behind. In a statement following Trump’s tweet, Toyota said its US employment will not decline when it moves Corolla production to the new factory in Guanajuato, Mexico (not in Baja, as Trump mistakenly claimed).
Relentless pressure on costs has led most automakers to Mexico, where they generally build compacts and subcompacts. Mexican workers earn about one-fifth what their American counterparts earn, and most automakers can’t make money on small cars made in the United States. The profit margin on small cars is often tiny and sometimes negative. Since labor is a bigger portion of costs on small, cheap cars than on larger, costlier ones, producing in Mexico lets automakers keep quality up while delivering the low prices consumers demand. That’s why most automakers are moving small-car production south of the border while refocusing US production more on expensive products with bigger product margins, as well as engineering, design and R&D.