Donald Trump will be inaugurated as the 45th President of the United States on Friday, and as the chief executive, he's put the restoration of American manufacturing at the top of his agenda.
The crown jewel of US manufacturing is and always has been the auto industry. But the industry has become extensively global, a process that's actually nothing new for carmakers.
General Motors has had its Opel division in Europe since before World War II. Countless Europeans grew up with small Ford cars in their streets. The Japanese and German automakers have been building cars in US factories for decades.
The management of vast, worldwide manufacturing operations means that car companies can shift around the point of origin for their vehicles, based on demand. This is the practice the Trump has waded into, as he's assailed automakers for changing the way they do business in the US, the world's most competitive car market.
A changing market
Profits in the booming US market are with SUVs and trucks; small cars have plummeted in popularity. So numerous carmakers want to move small production to regions where labor costs are lower — not so they can screw US workers out of jobs, but so they can use their US workforce to build high-margin vehicles, while not discontinuing their less profitable cars.
The real difficulty here is that the US market, after booming for several years, is reaching the upper limit of demand growth. The fact that there are still a lot of old cars on the road means that US sales will probably remain high by historical standards for a while, and Trump's economic policies could juke demand a bit further on the consumer side.
Yet, while sales could get a boost from last year's record of 17.55-million vehicles, carmakers are reluctant to build new plants or add jobs in the US now, for fear that they'll be stuck with idle capacity and layoffs when the downturn inevitably does arrive.
Industry executives are also mindful that they need to figure out how to grow their businesses in the event of the US downturn.
Globally, that means investing in China instead of the US.
RELATED: Ford autos through the years
Ford automobiles through the years
Ford automobiles through the years
Henry Ford in his First Passenger Automobile, Quadricycle, First Built in 1896, USA, circa 1903. (Photo by: Universal History Archive/UIG via Getty Images)
Henry Ford seated in his first Ford automobile on Grand Boulevard, Detroit in September of 1896.
ORIGINAL CAPTION READS: Three-quarter view of a 1908 Model T Ford. Undated photograph.
A well-dressed African-American couple stand by their 1909 Ford Touring car in Southern California. (Photo by Jonathan Kirn/Corbis via Getty Images)
The Ford factory, Manchester, c1911. Lines of Model Ts, off the production line. (Photo by National Motor Museum/Heritage Images/Getty Images)
Ford Motor Company Advertisement Featuring the Big Four Automobiles, circa 1909. (Photo by: Universal History Archive/UIG via Getty Images)
Sir Harry Lauder sits proudly in his 1914 Ford Model T 'sporty' touring car which sold for $550, complete with equipment.
Making the bodies for Model T Fords, 1915. Factory workers on the production line completing upholstery for the seats. A sack of stuffing lies on the floor. (Photo by National Motor Museum/Heritage Images/Getty Images)
The family gather in and on the running board of their automobile. (Photo by Jonathan Kirn/Corbis via Getty Images)
(Original Caption) View of a Ford touring car with passengers, 1923.
Actors ZaSu Pitts and Ford Sterling pose for this still from the 1927 version of Casey at the Bat. Pitts played the role of Camille, and Sterling played the role of O'Dowd.
1928: American inventor and industrialist Henry Ford (1863 - 1947) and his son, automobile executive Edsel Ford (1893 - 1943), sit in 'The Fifteenth Millionth Ford'. (Photo by Hulton Archive/Getty Images)
(Original Caption) 1929- Picture shows a Ford Town Car. Cloche hatted model is sitting on the running board.
Photo of an early Ford automobile. Ca. 1900s.
The Lincoln was, and still is, one of the luxury cars of the Ford Motor Company.
(Original Caption) 1928- Picture shows the 1928 Ford model A automobile.
G Kinsey-Morgan's Ford Model C Ten, winner of a silver award at the MCC Torquay Rally, July 1937. Ford 10 1172 cc. Vehicle Reg. No. CLJ617. Event Entry No: 84 Driver: Kinsey-Morgan, G. Award: Silver. Place: M.C.C. Torquay Rally. Date: 16/17.7.37. Artist Bill Brunell. (Photo by National Motor Museum/Heritage Images/Getty Images)
Ford's 1955 Thunderbird features all steel convenience and safety with high performance. It has roll up windows, a telescopic steering column, and is available as either a hard top or a convertible.
Replacing the Boss 429 and Boss 302, the 1971 Boss 351 Mustang features a competition suspension package and a potent 351-cubic-inch Cleveland engine.
1978-Ford Motor Company's Country Squire Station Wagon.
Man inspects a new Ford Motors Company car that has just come off the final assembly line.
(Original Caption) 11/10/50-Dearborn, Michigan: The custom four-door Sedan, featuring Fordomatic drive, has new refinements in styling to emphasize distinctive body lines. The new models have a dual spinner radiator grille, long wraparound bumpers and new ornamentation.
LOS ANGELES,CA - CIRCA 1954: Actress Lori Nelson poses in her Ford Thunderbird car at home in Los Angeles,CA. (Photo by Earl Leaf/Michael Ochs Archives/Getty Images)
circa 1955: A suburban family waving as they pull out of a driveway in a packed late 1950s model Ford Country Squire station wagon. (Photo by Lambert/Getty Images)
A 1955 Ford Consul Convertible MK 1. The first post-war cars from Dagenham were almost identical to pre-war models, but the 1951 'Five Star Car' Consul/Zephyr range was revolutionary. With American-styled unitary bodies scaled down for European markets, the cars featured new independent front suspension by Earle MacPherson. Convertibles, which accounted for less than 2% of production, were developed by Carbodies of Coventry in 1953. Both the Consul and 6 cylinder Zephyr were popular among fleet users and hire companies. Ford production in Britain, began in a converted tram factory in Manchester in 1911, transferring to the purpose-built Dagenham factory in 1931. (Photo by National Motor Museum/Heritage Images/Getty Images)
View of a 1959 Ford Thunderbird motor car, its convertible roof in the down position, parked outside on a grassy field, 1959. (Photo by FPG/Getty Images)
DAYTONA BEACH, FL â February 1957: Driving this 1957 Ford for car owner Pete DePaolo, Marvin Panch finished fifth in the NASCAR Cup race on the Daytona Beach-Road Course. (Photo by ISC Images & Archives via Getty Images)
A 1958 Edsel convertible made by Ford, 1958. (Photo by Underwood Archives/Getty Images)
View of a 1965 Ford Thunderbird motor car parked on a rotating floor in a showroom, 1963. (Photo by FPG/Getty Images)
On the beach, a group of young men and women lean or sit on a mid-60s Ford Mustang convertible (either a 1964, 1965, or 1966 model), which sports mid-1960s California plates (1963 - 1969), as they listen to a woman play an acoustic guitar, mid 1960s. There are a numebr of surfboards propped against the car. (Photo by Tom Kelley/Getty Images)
A young man washes the family Ford Anglia car on an Essex estate in the early nineteen sixties. Bending down to wring a leather dry into a bucket the young man cleans his father's beloved Anglia in the street outside the family house which interestingly, is otherwise empty of other cars. This is the new age of car ownership when newfound wealth meant families could afford to buy a vehicle and travel elsewhere after the war years of 1950s austerity. The Ford Anglia is a British car designed and manufactured by Ford in the United Kingdom. The Ford Anglia name was applied to four models of car between 1939 and 1967. 1,594,486 Anglias were produced. The picture was recorded on Kodachrome (Kodak) film in about 1961. (Photo by In Pictures Ltd./Corbis via Getty Images)
30th May 1975: The car assembly line for vans at Ford. (Photo by Evening Standard/Getty Images)
Ronald and Nancy with their new Ford Ranger pick up, in their Californian ranch 'Rancho del Cielo'. (Photo by jean-Louis Atlan/Sygma via Getty Images)
CIRENCESTER, UNITED KINGDOM - JUNE 30: Princess Diana At Cirencester Polo Club With Her Maroon Red Ford Escort Cabriolet Car (Photo by Tim Graham/Getty Images)
The Newly Designed 35Th 1999 Anniversary Edition Ford Mustang. (Photo By Getty Images)
2002 Ford Mustang Bullitt driving on country road, 2000. (Photo by National Motor Museum/Heritage Images/Getty Images)
384022 08: FILE PHOTO: Ford''s new fuel-efficient hybrid electric (HEV) concept Escape SUV vehicle sits in a showroom January 4, 2001 in Los Angeles during its debut at the Greater Los Angeles Auto Show. The newest version of Ford Motor Co.''s popular Escape sport utility vehicle reportedly earned low marks in crash tests conducted by the Insurance Institute for Highway Safety, April 23, 2001. (Photo by Ford/Newsmakers)
394154 02: (FILE PHOTO) A 2000 Ford Windstar minivan is seen in this undated photo. Ford announced September 6, 2001 that it had sent more than 750,000 recall letters to owners of 1999-2001 model Windstars after reports that the minivan's windshield wiper motor could potentially catch fire. Ford said that small holes in the system could allow water, salt and debris to clog the motor and ignite a fire. (Photo by Ford/Getty Images)
2005: Ford Freestyle SUV. (Photo by John B. Carnett/Bonnier Corporation via Getty Images)
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Big in China
China's auto market is already bigger than the US market, with about 20 million annual sales. It could grow to 40 million. In any case, it's where the major future growth in auto sales will be.
Ford, General Motors, and Fiat Chrysler Automobiles all want in on that action. A river of investment will flow in the direction of China — and a river already has. But this means partnering with Chinese industry: a US automaker can only make and sell vehicles in China through a joint venture with a Chinese company.
In practice, this also means that US car companies can use their foreign manufacturing capacity to quickly satisfy US demand. For example, Buick is a hugely popular brand in China. So when General Motors needed to capture some crossover SUV demand for the brand in the US, it could import a Chinese-made Buick, the Envision.
Since imports began in mid-2016, sales heave steadily climbed, hitting almost 4,000 vehicles in December.
For the record, the United Auto Workers wasn't happy about this move. But if GM had adjusted US manufacturing to build the Envision, it could have lost over 10,000 highly profitable sales in 2016. To make matters worse, GM might have also had to shift production around, with the understanding that shifting passenger-car production to Mexico or even Canada was a non-starter thanks to Trump's "America First" politics.
For automakers, no choice
Capacity expansion isn't going to happen in any meaningful way in the US. But it is, and must, happen in China. US automakers — not to mention the Volkswagens, BMWs, Toyotas, and the Mercedes of the world — literally have no choice about this. Taking a pass on a piece of 20 million in potential future vehicle sales would be reckless business.
I know what you're thinking: Why not build the Chinese-market vehicles here and export them, addressing the trade imbalances in the process?
That adds too many logistical and cost layers to the system. For a huge part of the 20th century, carmakers established that building cars where you sell them is the optimal arrangement. And to use a 21st-century example, Tesla would very much like to set up a joint venture in China to make its cars, rather than having to deal with the headaches of exporting them from California, as it now does.
There's a good chance that Trump will fixate on this. If Ford, GM, and FCA all built new plants in the US, thousands of jobs in states that went for Trump would be created. That additional capacity could also add to GDP growth.
But it would be very high-risk capacity, given that there isn't adequate future demand in the US market to support it.
So if you think it through, you can see how an unlikely short-term win for Trump — new factories and new jobs in the US — could at least in the car business become a long-term liability: massive layoffs and an idled plant in Ohio or Michigan when the downturn arrives, probably ... right around the time the 2020 election cycling is starting up, given the probable dynamics of the current auto market in the US.
The automakers already know how to deal with the financial impact of the US downturn: grow their market share in China (as well as in other global markets). That wise analysis of their future balance sheets isn't going to sit well, however, with President Trump.