Trump doesn't understand how much it costs to build a car — or a new Air Force One (F, UTX, BA)
AP Photo/Evan Vucci
President-elect Donald Trump ran on a platform of restoring glory to American manufacturing, but since winning, he's shown that he doesn't know much about how stuff gets made in the 21st century.
For example, during the campaign he attacked Ford for shifting small-car manufacturing to Mexico (where, by the way, Ford has operated plants since the 1960s) and later took credit on Twitter for preventing Ford from relocating an entire Kentucky factory south of the border when in fact Ford was only planning to move production of a vehicle.
Ford later decided to keep that production in Kentucky, at the cost of building building more of a hot-selling mass-market version of the same car (Lincoln MKC SUV was slated to be moved — in 2018 — but Ford Escape production would have increased, with no losses of jobs in the US).
Trump's tweets strongly suggest that he doesn't understand how modern auto manufacturing works, or how market conditions determine how automakers make money.
Cars are built using global platforms, so that economies of scale can be achieved worldwide and carmakers can adjust the types of vehicles they're selling based on consumer demands and profitability. The dustup with the Kentucky plant aside, Ford wants to move production of small cars to Mexico so it can sell them profitably because at the moment US consumers don't want small cars, they want SUVs.
Compounding that problem are the skinny profit margins on smaller vehicles. Ford would rather use its US-based small-car manufacturing capacity to build those more popular SUVs. But the automaker doesn't want to drop small-cars because they help with government fuel-economy regulations and because the small-car market could be important again if gas prices spike in the future.
Furthermore, Ford's union workforce is more secure if the automaker continues to use its American plants to build its most popular and profitable cars.
What about planes?
AP Photo/Evan Vucci
On Tuesday, Trump tweeted again, this time insisting that out-of-control costs on not-yet delivered replacements for Air Force One demand that the Pentagon's contract with Boeing be cancelled.
As Business Insider's Ben Zhang reported, Trump was wrong about how much the two new Boeing 747s would cost — he said $4 billion when the Government Accountability Office said $3.21 billion for the entire program — but the more troubling aspect of Trump's stance, outlined later when talking with reporters, was that Boeing is trying to gouge the government on the new presidential aircraft.
The 747s that will become the new Air Force Ones by 2024 are obviously unique aircraft that will have to remain in service for decades. But beyond that, Boeing could discontinue building the four-engine 747 altogether in coming years, as it's no longer the epic intercontinental plane it was during its glory years. It's not out of the question that Air Force 1 could be the last 747 still flying one of these days.
Boeing of course wants the contract to build the plane — it's a prestigious responsibility. But four-engine jumbo-jets are hardly the company's sweet spot. If the United States wants a American company and American workers to produce a new Air Force One, however, Boeing is the only game in town. In a sense, Boeing is doing the Pentagon a favor, and it was speculated when the new Air Force One contract was announced that the plane maker was keeping the 747 going just so it could supply the President's new jet.
And air conditioners made in Indiana?
AP Photo/Evan Vucci
What about Trump's deal with Carrier to make good on a reportedly forgotten campaign promise to save jobs in Indiana from moving to Mexico?
Again, Carrier's parent company, United Technologies, is still relocating jobs — just not as many as before. What it won't save by moving the jobs is a drop in the bucket — $65 million — compared to its $56 billion in annual revenue. It's also getting $7 million in tax breaks over a decade.
The overarching outsourcing trend in this segment of the manufacturing economy is more complicated than it looks and doesn't necessarily mean bad things for US workers. According to the Bureau of Labor Statistics, the average hourly wage for US manufacturing jobs is about $21. As some commenters on the Carrier deal have noted, keeping jobs in the US so that they don't go to Mexico could provide an incentive for expanding production there, which ultimately could generate downward pressure on US wages.
The focus of a US manufacturing policy should probably be on how much workers are getting paid, not how many workers there are (which isn't the same thing as saying factories should run with far fewer workers, because manufacturers should still strive to be major employers). Manufacturing companies have been negotiating multi-tier wage structures with workers — the auto industry is the prime example — meaning that new hires make less than legacy employees.
Labor costs in Mexico will invariably rise, discouraging companies from relocating there, so US jobs that were outsourced could be "in-sourced," or brought back to US. But workers probably don't want them to come back to lower wage levels.
Trump's grasp of all this appears to be blunt at best. We can give him the benefit of the doubt that he and his accountants understand the tax code or bankruptcy law. But when it comes to how US and global manufacturing works, he's out of touch.