Call it the Donald Trump effect but the last 10 days have seen three top car companies commit investments of nearly $12 billion in the US.
The first to get off the mark, barely a couple of days into the New Year, was Ford Motor Company, which announced that it is earmarking $700 million for the US. In the process, the company also made it known it is shelving its $1.6-billion outlay for Mexico.
Earlier this week, Fiat Chrysler Automobiles said it would be investing $1 billion in the US while Toyota Motor Corporation quickly followed suit, announcing a five-year outlay of $10 billion.
Trump, who will sworn in as US President next Friday, was quick to praise Ford and Fiat Chrysler in his tweets.
Before Toyota had made its announcement, he had sounded out a warning to the company that cars imported to the US from Mexico would be levied a hefty tariff. This was a clear reflection of his intent to revisit the North American Free Trade Agreement (NAFTA), which covers the US, Mexico and Canada. Should this threat become a reality, there is every likelihood of a hefty levy coming into place where Mexico will be the worst hit.
Fiat Chrysler was categorical that its investment was part of a business plan while Toyota pretty much echoed this line. Ford, likewise, maintained that the move to call off the Mexico plan was purely a commercial decision. Its American counterpart, General Motors, has been warned by Trump that it faces the possibility of coughing up taxes for the Chevy Cruze produced in Mexico and sold in the US.
It now remains to be seen how many more car companies will join the US investment chorus to assure the President-elect that they are in line with his vision. What seemed a warning to only American brands is now clearly targeted at all car companies contemplating a gateway to the US from Mexico.
As a result, there is a real threat to Mexico’s standing in the global auto arena. It was touted to be among the five largest car producing regions by 2020 but if Trump has his way with NAFTA, things could go horribly wrong as companies could end up freezing investments in Mexico. This could have a catastrophic fallout on the prospects of faster job creation and higher incomes.
Kia Motors has been among the latest entrants to Mexico and will have to recast its business plan if this factors in substantial shipments to the US.
Brexit exampleAfter all, it will be difficult to make operations viable with the likelihood of hefty import duty levy on cars from Mexico.
Reports have also been doing the rounds that Nissan could be the worst hit, since a large chunk of its output from Mexico heads out to the US. It faced a similar situation when Britain opted out of the European Union but has since been assured by the British government that things will be on track.
For the moment, it is Mexico that faces the heat, with the Trump administration firmly in favour of investments being routed into the US. While the American workforce will have reason to celebrate, carmakers will have to cope with the reality of higher labour costs unlike in Mexico where the outgo would have been considerably lower.