Ford Moving Production Overseas: Can It Still Compete?

Ford (F) is shifting the production of two of its smaller models, the Ford Focus and Ford C-Max, from Wayne, Michigan to somewhere overseas, according to a Thursday report from The Wall Street Journal.

The move comes just weeks before Ford re-opens negotiations with the United Auto Workers union (UAW), so it’s easy to write this off as a simple strong-arm tactic from afar.

ford f stockBut while the timing of the announcement opens itself up to some cynicism, Ford isn’t entirely bluffing. The company has to do something about costs if it wants to keep up with the rest of the herd.

F stock has lost 17% in the past year and is down 7.5% year-to-date.

The company’s cost structure isn’t a new concern — American automakers have been combating Asian rivals for decades now — but the issue is more important than ever for anyone thinking about buying Ford stock today.

Plant Will Move Overseas in 2018

The move is simply more bad news for the tiny industrial town of Wayne, Michigan, which has a population of less than 18,000. According to Bloomberg:

“Ford already has laid off a shift of 700 workers in Wayne, as U.S. sales fell 3.2 percent for the Focus and 17 percent for the C-Max in this year’s first half. Small cars and hybrids have become a hard sell as U.S. gasoline prices have fallen 24 percent from a year earlier to an average $2.76 a gallon.”

Ford’s decision to change how it allocates resources based on shifting demand is understandable. But if you’re a Ford exec in the C-suite right now, you’re probably more worried about the Ford stock price than projecting out gas prices and demand three years. I’m sure those projections exist, but they’re pure guesswork at this point.

The real issue here is labor costs. Per Bloomberg:

“Ford wants to lower its labor costs, which it says are uncompetitive. Ford’s average U.S. hourly labor expense, including benefits, is $57, about $9 more than at Toyota Motor Corp. and Fiat Chrysler Automobiles NV’s U.S. unit, according to the Center for Automotive Research in Ann Arbor, Michigan.”

Ford can and will continue to make changes to limit its labor costs, just like any other company. But Ford and American peer General Motors (GM) face a far steeper competitive disadvantage from something entirely outside their locus of control: currency exchange rates.

Japanese rivals like Toyota (TM), Honda (HMC) and Nissan (NSANY) are all saving big bucks as the U.S. dollar surges, making imported good cheaper in the states.

It’s an issue Ford has been keenly aware of and isn’t very happy about. Bob Shanks, Ford’s CFO, complained in January that Toyota alone made an extra $10 billion in 2013 due to a weak yen, claiming that Japanese carmakers can squeeze as much as an extra $11,000 in profit out of every car because of the weak yen.

There isn’t much you can do about that. (Well, Shanks wants the U.S. government to declare Japan a currency manipulator, but don’t hold your breath.)

In the meantime, Ford will have to look to cut costs in other ways to keep a competitive edge, and owners of F stock should cross their fingers and hope the dollar declines. Although Ford’s a great dividend stock, yielding upwards of 4%, the cost of a strong dollar isn’t able to be farmed overseas.

I’d hold off on Ford stock until the dollar shows legitimate signs of weakness.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/ford-f-stock-production-overseas/.

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