Ford: From Mexico to China

Ever since Donald Trump declared his intention to seek the Presidency of the United States, he has heavily criticized American firms that manufacture products in Mexico. One of those firms, for instance, has been the Ford Motor Company.

His criticism began in earnest more than a year ago, when Ford announced its intention to shift production of the subcompact Focus automobile from Wayne, Michigan to a new plant in San Luis Potosi, Mexico. But shortly after the Presidential election, Ford announced that it would reinvest in the Wayne production facility.

That produced celebrations in the American workforce, but astute observers noted that Ford didn’t actually announce that Focus automobile production would revert to Wayne. Instead, the firm declared that it would produce the subcompact at Hermosillio, a different location in Mexico, and would shift other vehicle production to Wayne.

And last week, less than six months later, Ford changed its plans again. Now it plans to shift the production of the Focus to China.

China? Whoa! The United States economy would undoubtedly be much better off with production of the Focus in Mexico, and not in China. After all, a Mexican final assembly factory would be sufficiently near the United States to purchase components from American suppliers.

And Mexican consumers, working in Mexican factories, are usually far more likely than Chinese consumers to purchase products that are manufactured in the United States. They’re also far more likely to use the online services of firms that are based in the U.S., considering that internet titans like Facebook and Google are banned from the Chinese mainland.

And what was President Trump’s response to Ford’s latest decision? Although he greeted Ford’s earlier decision by tweeting “Thank you to Ford for scrapping a new plant in Mexico …,” he hasn’t yet replied to the announcement of the shift to China.

Of course, it’s entirely possible that he might still comment on it. And it’s also quite possible that Ford will change its plans yet again.

But for the moment, it appears that Mexico’s loss is not the United States’ gain. It’s China’s gain, and thus the United States’ loss as well.

Zombie Banks at Halloween

Why does Hewlett Packard spin off its personal computer and printer operations while the Bank of America remains a financial supermarket? For that matter, why is eBay compelled to shed its PayPal unit while Citigroup continues to operate retail bank branches and institutional service units under one roof?

In just the past two weeks, Hewlett Packard and eBay announced divestitures of significant ancillary operations in order to focus more intently on their core businesses. Meanwhile, Bank of America and Citigroup were preoccupied with their respective $8.5 billion and $16 million regulatory settlements while maintaining their existing lines of business.

Why is this possible? Why do technology firms cut themselves to pieces while global banks pay for past transgressions and continue practicing “business as usual”?

Well, in the turbulent technology sector, firms like Hewlett Packard and eBay must compete with numerous new rivals like Lenovo and Square. Heck, even the “venerable” Apple only emerged as a technology titan with the introduction of the iPod a decade ago.

But Bank of America and Citigroup? They and their four competitors of the American “Big Six” banks (i.e. Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Wells Fargo) are all more than a century old. Only one was even founded in the twentieth century; the baby of the bunch, Bank of America, was launched in 1904 as the Bank of Italy in San Francisco.

Oddly enough, both the technology sector and the financial service industry maintain comparable traditions of innovation. After all, who can say whether the iPad and the Google Glass are more ingenious (for better or for worse) than the Interest Rate Swap and the Collateralized Debt Obligation?

So the secret of the longevity of the nation’s largest banks cannot be attributed to a superior pattern of innovation. But what other factor can explain why great technology firms perish? While ancient banking institutions continue to roam across the country like the zombie undead at midnight?

The answer may be found in federal government policy. Regulators have consistently permitted technology driven firms like General Motors, Kodak, Polaroid, Texaco, and Wang Laboratories to enter bankruptcy court. Despite reportedly becoming insolvent during the recent global economic crisis, however, none of the Big Six banks were ever permitted to do so.

Instead, with the support of TARP and other government aid programs, the banking institutions have been kept alive. Like zombies in a Halloween film, they maintain all of their limbs in perpetuity … and they simply refuse to die.

Big Tobacco is Back!

Let’s review the recessionary wreckage of America’s aging industrial landscape. Can we see a glimmer of progress anywhere on the horizon?

A hint of renewal? A speck of growth? A spark of innovation?

Across the United States, it’s tough to find a blue collar industry that appears well positioned to take on global rivals. In the automobile business, for instance, GM has now delayed the launch of its electric automobile Volt until 2010 while Toyota continues to win awards for its Prius. And energy companies like Exxon continue to Drill Baby Drill for oil in places like Iraq while Chinese firms leap to the forefront of the renewable energy sector.

And yet there is one American industry that is exhibiting signs of stabilization and growth. Ironically, it’s the oldest industry of all, one that traces its roots to the very first colonial settlement in 1612 in Virginia.

That industry, of course, is tobacco.

Rise and Fall

Ever since the native American tribes introduced tobacco to the first American settlers at Jamestown, the leafy product has been a major component of our domestic manufacturing and export base. Pipes, cigars, and cigarettes quickly spread throughout Europe during the ensuing centuries, trailed by the inevitable spread of lung cancer and other respiratory diseases.

American servicemen further carried the flame of the major U.S. cigarette brand Camel when they ventured forth across Europe to fight the first world war. Like Coca Cola, Wrigley, and Hershey, the Marlboro Man became a dominant global brand during the heyday of American industrial might in the 1950s.

But the Surgeon General’s report of ill health effects hurt the industry in 1964. Over the ensuing decades, the government banned cigarette advertisements from broadcast television and radio, slapped punitive taxes on the sale of tobacco products, and even banned smoking outright in airplanes, restaurants, bars, and most other public places.

Phoenix Rising

And yet, like a phoenix rising from the ashes of a pile of cigarette butts, the industry has been finding its way back to stability and growth. Just this past week, the U.S. Centers for Disease Control reported that the percentage of Americans who smoke actually increased to 20% last year. And Reynolds American, proud heir to the Virginia based R.J. Reynolds tobacco empire, is negotiating the purchase of a smoking cessation product manufacturer called Niconovum AB.

It may not be very surprising that tobacco usage is spiking upwards during a period of economic hardship; after all, one would expect financially stressed Americans to reduce expenditures on expensive luxuries and increase them on small and relatively cheap “guilty pleasures.” But a tobacco company investing in a smoking cessation device? Why would a firm invest in an ancillary product that is designed to eliminate the use of its primary one?

At first glance, such a strategy might strike one as product diversification run amok. And yet such hedging strategies often play an important role in many business scenarios.

Both Sides of the Table

A classic example of this strategy was the sale of Sharps military carbines to the Confederate army of the southern states during the American Civil War of the 1860s. This firearm was also popular with the Union army of the northern states, and thus Sharps found itself supplying a pair of military forces that were actively engaged in destroying each other.

The modern manifestation of such domestic civil warfare is the bruising series of political election campaigns that pit Democrats against Republicans on the first Tuesdays of each November. Many American companies and their lobbyists routinely make political donations to candidates in both parties; in fact, they often support opposing candidates for the same political offices! Although candidates today use television advertisements instead of firearms to wage their battles, the results are often equally brutal: after each election, one political career may die while the other survives to fight another day.

This “investing in one’s opponent” strategy may also appear in more subtle ways. Until recently, for instance, Microsoft sold subscriptions to its OneCare antivirus software service; this line of business would inevitably grow whenever nefarious hackers exploited weaknesses in its Windows operating system. And stock market analysts continue to advise their clients to diversify their holdings and purchase industry index funds that invest in firms that compete with each other.

So Reynolds American’s strategy of investing in a smoking cessation product is actually a time tested corporate technique for hedging one’s bets. In fact, by playing both sides of the table in this manner, the tobacco industry may well ensure that it survives to experience its fifth century of existence.