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<\/p>\n<\/div>San Diego<\/i> \u2014 Ford has come under withering criticism from President-elect Donald Trump for moving production of its slow-selling Ford Focus and plug-in Ford C-Max compact cars to Mexico. The small Fords follow other manufacturers that produce their compacts south of the border including Nissan, Volkswagen and Mazda.<\/p>\n
In addition to labor costs \u2014 an estimated $600-per-car cheaper \u2014 shipping cars from Mexico to other markets can save thousands in tariff costs because Mexico has more foreign free trade agreements than the U.S.<\/p>\n
Subaru is bucking that trend. The carmaker announced earlier this year it is expanding its Lafayette, Indiana, plant to produce its all-new, fifth-generation Impreza compact. The Impreza made its testing debut to media here this month and is now arriving in dealer showrooms.<\/p>\n
While political necessity often reduces trade issues to bumper-sticker slogans, the Subaru vs. Ford situation reflects the complex factors that drive plant location in a global market.<\/p>\n
Though Subaru won\u2019t give precise figures on how many Imprezas will roll out of its huge, 3.4 million-square-foot facility, the Indiana plant is expected to meet U.S. demand for the popular, all-wheel-drive sedan and wagon. The non-union operation makes 380,000 vehicles a year (including Legacy sedans and Outback crossovers). The previous-generation Impreza was made in Japan.<\/p>\n
\u201cSubaru Indiana Automotive has a long history of building high quality vehicles,\u201d says Senior Executive Vice President of SIA Tom Easterday. \u201cIndiana has a very favorable business climate, many Subaru suppliers are located nearby, and we already have the administrative structure in place \u2014 so it made sense to expand SIA rather than build a plant somewhere else in North America.\u201d<\/p>\n
Though Subaru has operated in Lafayette since 1989, SIA was a joint venture with other manufacturers, including Toyota, which produced Camry sedans there. But since its fourth-generation, 2011 debut, Impreza has more than doubled sales from 41,000 a year to more than 100,000 in 2015. Combined with a tripling of overall U.S. Subaru sales since 2008, the company decided to focus more production resources in Indiana with a $1.3 billion investment.<\/p>\n
\u201cIt made sense to use that plant capacity to make the Impreza here,\u201d says Subaru car line product manager Todd Hill, who works at the company\u2019s U.S. headquarters in New Jersey. \u201cOther markets have been experiencing growth, too, so adding that capacity helps us produce more cars for this market.\u201d<\/p>\n
Ford, by contrast, has seen its Focus sales decline by more than 40,000 units since 2012 in a segment with razor-thin profit margins. Labor costs disproportionality impact small cars.<\/p>\n
\u201cLabor is just one variable in manufacturing a car,\u201d says Bernard Swiecki, senior auto analyst with the Center for Automotive Research in Ann Arbor. \u201cBut it is a much higher variable cost in small cars, which is why their production has been moving to Mexico as their sales stagnate and consumers move to SUVs.\u201d<\/p>\n
Another variable, says Swiecki, is whether a vehicle is \u201cdue to leave NAFTA.\u201d<\/p>\n
NAFTA is the North American Free Trade Agreement, which eliminates tariffs between Canada, the U.S. and Mexico. But cars made in the United States still have to pay a tariff if they\u2019re exported to Europe. So Audi chose to make its new, 2017 Q5 crossover in Mexico even though it\u2019s a high-margin SUV. Why? Because it can ship to both the U.S. and Europe tariff-free courtesy of Mexican free trade agreements with 45 countries, compared with U.S. trade deals with only 19 countries.<\/p>\n
That $5,000 tariff savings to Europe on a $40,000 luxury vehicle like the Audi is a huge incentive to locate a plant in Mexico. The same incentive drove Nissan south because Mexico trades tariff-free \u2014 unlike the U.S. \u2014 with South America. Contrary to U.S. political rhetoric, says Sweicki, fewer tariffs would benefit U.S. workers.<\/p>\n
Geography also played a role in Subaru\u2019s decision to locate in the U.S., since the small Japanese automaker operates just two plants: Gunma, Japan, and Lafayette. Ford, meanwhile, has multiple North America facilities that allow it to optimize plant capacity by playing musical chairs with a broad range of products. As Focus vacates the Wayne, Michigan, assembly plant for Mexico, it will be replaced by the new Ford Ranger pickup and Bronco SUV.<\/p>\n
\u201cIf I were a Wayne worker, I would be glad that the Focus is going to Mexico and being replaced by trucks,\u201d says CAR\u2019s Sweicki. \u201cWith higher demand, they are more likely to stay in the U.S.\u201d<\/p>\n
Perhaps the biggest reason the Impreza can produce economically in the U.S. is its best-in-class economics. With the highest brand loyalty, highest resale value and highest-in-class safety rating, the AWD Impreza commands unusually high margins among compact cars.<\/p>\n
\u201cSubaru is a different beast,\u201d says Swiecki. \u201cIt commands a premium price for the Impreza so it doesn\u2019t have to put incentives on the hood like other automakers to move its vehicles.\u201d<\/p>\n