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Bailout Nation: Ford on the Federal Dole, Too

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The idea that Washington has successfully rescued the auto industry is nothing but propaganda.

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Owing to the NAFTA agreement, the auto industries of Canada, Mexico, and the USA are configured to function in an integrated single market. Due to the absence of tariffs or other border frictions, for example, the big auto OEMs have been free to optimize their North American assembly-plant footprints based on costs, vehicle specialization, and other purely production factors. Ford (F) is no exception.

Thus, Ford can produce upward of 300,000 mid-sized sedans (e.g. the Ford Fusion) at its world-class manufacturing complex in Hermosillo, Mexico, for sale on dealer lots throughout North America. Likewise, its range of crossover vehicles, such as the Ford Edge, are made at its big facility in Oakville, Canada, for retail distribution in Canada, the USA, and Mexico. Finally, its slate of pick-ups, SUVs, and compact cars are made at specialized plants in Michigan, Ohio, Illinois, Kansas, and Kentucky, for sale in all three markets. The broad contour of Ford's logistical flow within the NAFTA single market, then, is that family-size sedans flow north, crossover vehicles flow south, and trucks and compacts go in both directions.

So with Mr. Market functioning at his efficient best, President Obama showed up last week at Ford's South Side plant in Chicago in what amounted to an exercise in carrying coal to Newcastle. Specifically, he announced that Uncle Sam would be favoring Ford with a $250 million loan guaranteed by the Export-Import Bank. In the words of the latter's press release, "The loan facility will finance….export sales for over 200,000 vehicles being sold to buyers in Canada and Mexico."

Say again! Every one of said 200,000 pickups, SUVs, and compact cars made in Ford's US plants would be sold in Canada and Mexico anyway because that's how Ford's integrated North American production and marketing system is set up. Since there's virtually no possibility of even a single incremental export sale to Canada and Mexico under this scheme, the below-market interest subsidy on the loan will go straight to Ford's bottom line. Indeed, some fancy economist would doubtless judge that this subsidy amounts to a pure dead-weight social loss. Another description would be that it's pointless, wasteful and, well, dumb.

Moreover, while the President was in town to collect $2.5 million from several fund-raising events, he used the occasion to brag that the South Side plant had also been the recipient of a $400 million loan to encourage more fuel-efficient vehicles .Here's where it gets dumber. The new Ford Explorer to be made at the Chicago plant will average less than 25 mpg in combined city and highway driving. This means that it would actually flunk the Obama Administration's new fuel economy standard (CAFÉ) for lights trucks which will reach 29 mpg when fully effective!

But then the real reason for the $400 million of taxpayer largess wasn't to help Ford make the grade on the counter-productive Federal CAFÉ standard, but to bail out its commercial chestnuts. Both the Explorer and the South Side plant were completely flunking the test that actually counts -- that of the marketplace. Prior to the taxpayer-funded retooling of the South Side plant, it manufactured the lumbering last generation Ford 500/Taurus -- the company's biggest bomb since the Edsel. And as for the Ford Explorer, the previous model had gotten so long in the tooth and out of step with the current marketplace that sales had fallen from the traditional level of 400,000 per year to a mere 50,000 in 2009.
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