When Henry Ford started selling vehicles, he wanted to be vertically integrated and every part of the car which came off the line of the Rouge Plant in Detroit was made by Ford. This created a lot of jobs and as long as the Model T was the number one seller, it was not a problem. Similar to many companies that do not innovate much after it has a number one position, competition continued as well as Ford’s demand you can buy any Model T you want as long as the color is black. Eventually, that sentiment and others led to the decline of Ford and the rise of GM.

GM’s rise led to the management system of the President of GM called the Alfred Sloan which led to the GM system which held that every income group needed their own vehicles. Given the pricing and 5 car systems of Chevrolet, Pontiac, Buick, Oldsmobile and Cadillac the idea was the more income you earned, you would move to a different vehicle in the GM System. It worked till the difference between the cars was more cosmetic than anything else as GM was using the same base for the different brands. Eventually GM stopped producing some of the brands, because consumers saw limited value.

The next phase was the introduction of Japanese cars into the US marketplace. At first the autos were inexpensive, but broke down often. Then the quality improved and US quality went down, soon people switched to Japanese brands. If you know someone who has a Japanese brand and their odometer is above 100,000 miles, the Japanese brand often is expected to go further than the US brands. Part of the reason was the Japanese system was the car company put together the parts, but they were made by supplier companies whose purpose was to produce good parts. The US companies agreed with the system and moved to putting things together and the rise of supplier companies to the auto companies. All the 3 major auto companies spun out their supplier companies to stand alone businesses and only put things together under a just in time process. This also saved them on inventory costs.

The supplier companies are both innovative and cost driven. This means when NAFTA was signed and then ratified again by the USMCA agreement, whatever country or state has the greatest benefit, the car companies and their suppliers would locate in that country. The system developed that integration was important aspect of the system. Another aspect is the number of jobs in the manufacturing of vehicles has gone down because of the use of robotics. A manufacturing company supplying the auto industry used to be worth 10,000 plus jobs, now the number is 3,000 and declining.

In an article by Eric Atkins of the Globe and Mail, an across the board tariff that President Trump has proposed would devastate the US auto industry according to Ford CEO James Farley.

The tariff would send costs up that would be needed to be passed on to consumers in the form of higher prices and it helps South Korean, Japanese and European companies who would not be subject to the Mexican and Canadian tariffs.

Sherry House, Ford’s CFO said about 90% of the company’s steel and aluminum comes from US sources. However, many of Ford’s suppliers use international metals that would be subject to the tariffs and that sends up costs to Ford. The higher costs would be expected to higher prices and likely job cuts and inflationary pressures.

Linking to dividend paying stocks, the most important aspect of a company is the allocation of capital to produce a return on investment. The allocation of capital is broken down to short, medium and long-term investments. No one allocates capital to build up manufacturing for the next administration to change the rules. It is the reason why companies like a sense of stability, they need to allocate capital under the existing rules, not hopefully what the rules will be in 5 years’ time. It is the reason why most companies would cut their long-term capital allocations, to buy back stock or return dividends in the hope that stability returns to the marketplace.

There are more questions than answers, till the next time – to raising questions.