Global Insight Perspective | |
Significance | Ford's investment will see the replacement of production of the F-Series truck with the new Fiesta at its Cuautitlan plant in Mexico, while the company will also build light-vehicle diesel engines and new transmissions in the country. |
Implications | The investment is the largest ever in the Mexican automotive industry, already the country's largest industrial sector, and is expected to create up to 30,000 extra jobs, both directly and indirectly. |
Outlook | Ford is replacing production of the F-Series, previously one of its main profit drivers and its best-selling model, with an untried, low-margin subcompact, underlining the enormity of the challenge for the carmaker in the worsening climate. |
Ford has announced that it will invest US$3 billion in its Mexican operation in order to enable it to manufacture the new Ford Fiesta subcompact for North American markets. Ford will invest the money, the largest ever single investment in the Mexican automotive sector, in its Cuautitlan assembly plant, near Mexico City, which will build the Fiesta model beginning in early 2010, and in its Chihuahua engine plant, which builds I-4 engines, which will also assemble diesel engines for light- and medium-duty trucks for a variety of global markets. In addition, through a joint venture (JV) with Getrag, Ford will establish a new transmission plant in Guanajuato to support various of its products. Company officials announced the trio of investments jointly with Mexican President Felipe Calderón.
"Ford is absolutely committed to leveraging our global assets to accelerate the shift to more fuel-efficient small cars and powertrain technologies that people really want and value", said Ford President and Chief Executive Officer (CEO) Alan Mulally, who was in Mexico for the announcement. "Our investments in these facilities in Mexico are part of our plan to further realign our manufacturing capacity in line with the introduction of more small cars and crossovers", he added.
The investment is expected to create 4,500 new jobs directly at Ford's operations in Mexico and some 25,000 new jobs at suppliers, both directly and indirectly. "The auto industry has become consolidated as one of the pillars of our economy", said Calderón. "It's one of the principal sources of exports, of foreign investment and as a result, of jobs in the manufacturing sector", he added.
The decision will involve Ford removing F-Series truck production from the Cuautitlan plant and converting the facility to allow it to build the new small car. Ford said that it will add a hatchback version to the sedan model planned for the U.S. market. Supply of the F-Series for the local market will be catered for from the United States in future.
The new Fiesta will closely resemble the Verve concept shown at various motor shows around the world last year. "Customers responded very positively after seeing both the sedan and hatchback versions of the Verve small car concept", said Mark Fields, president of the Americas division of Ford Motor Company. "We know the market is headed toward more small cars and crossovers. With our product and manufacturing flexibility, we will be able to offer both models and add production capacity", he added.
Production will begin in early 2010 and the investment is expected to lift Ford of Mexico's annual output to nearly 500,000 vehicles and 330,000 engines by 2012, with nearly 80% of the vehicles and most of the engines slated for the North American market.
Outlook and Implications
Ford's long-awaited decision on its North American production location is of significant strategic importance both to the company and to Mexico, where the automotive industry is the country's largest industrial segment and the 10th largest global producer of light vehicles.
Although Mexico enjoys a competitive advantage in terms of its location and cost base, with low overhead costs, good labour productivity, and low wages, it is also marred by high electricity costs and was recently ranked as the least competitive in terms of technological and infrastructural development of the world's top-10 vehicle-producing nations, according to Ford’s own estimates (see Mexico: 24 April, 2008: Ford Executive Sees Lack of R&D as Mexico's Weak Point). Louise Goeser, president and CEO of Ford's Mexican division, said that Mexico has the fourth most expensive primary materials of the top-10 vehicle-producing nations, making up 27% of the total cost of a vehicle, while it also has the second-highest electricity costs, behind Japan.
However, Mulally said on Friday (30 May) of Ford's investment in the country: "(It) is a centerpiece for Ford's global strategy today", citing Mexico’s geographic location, its highly qualified labour force, and its economic stability. Ford's Mexican plant also has some experience of making small cars—until last year it produced the old Ford Ikon, a Fiesta sedan for local sale, based on the old Ford Europe B3 platform, in small numbers.
The confirmation that Mexico will host the new plant at last ends rumours that Ford would base production of the new model in Brazil, considered by many industry observers as a risky strategy at the time. The final decision is likely to have been swayed by the continuing decline in F-Series sales—Ford has considerable overcapacity of this model in the current climate—along with Mexico’s comparatively low-labour-cost base, which will aid profitability, which is notoriously weak in the Fiesta’s segment.
The key for Ford now is to ensure that the quality of the subcompact is up to the standard of the competition. The Fiesta is one of Europe's best-selling subcompact (B-segment) models and the recent sharp redesign has won plaudits from all quarters, notably in the United States. However, the fact that Ford has decided to replace production of the F-Series, one of Ford's most profitable vehicles and its best-seller, with a low-margin subcompact model with no sales track record in the U.S. market underlines the enormity of the task facing the company. Global Insight currently forecasts production of the new model to hit 80,000 units in 2012, although this could be exceeded if it proves a hit with consumers.