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Ford, Nissan, Others with Mexico Ties Gird for Trump Aftershocks

Nov. 9, 2016
“Trump could impose a large tariff on vehicles and parts coming in from Mexico,” economist Donald Grimes said before the election. “This would clearly hurt the profitability of the auto industry in the short run." 

Companies with deep ties to Mexico--from Corona beer importer Constellation Brands Inc. to Ford Motor Co.--are reeling after Donald Trump’s unexpected election as the 45th U.S. president.

Trump campaigned on vows to build a wall along the southern border, deport millions of Hispanic immigrants, dismantle the North American Free Trade Agreement and ignite a trade war with Mexico. That doesn’t bode well for companies like Kansas City Southern and Union Pacific Corp., whose railroads haul goods between Mexico and Canada on the so-called NAFTA highway. Mexico sends almost 80% of its exports to the U.S. It’s also not good for firms like Constellation, which counts Hispanic immigrants among its most loyal customers.

“Companies with exposure to Mexico, we assume will see some pressure,” Pablo Zuanic, an analyst with Susquehanna Financial Group, said Wednesday morning. “If a company has exposure to the Hispanic immigrant community, we’re not sure what’s going to happen to that customer base.”

Kansas City Southern generates about 48% of its revenue in Mexico. Union Pacific also would be hurt because about 10% of its sales come from hauling goods to and from Mexico, according to Keith Schoonmaker, an analyst for Morningstar.

“If that trade is hampered, that’s certainly a negative for Kansas City Southern,” Schoonmaker said before the election results were known. “It’s pretty uncertain what the long-term renegotiation of NAFTA would look like, but even just the sentiment of ‘there’s a candidate who just won who thinks NAFTA is a bad idea,’ -- that certainly wouldn’t be a positive.”

Kansas City Southern shares plummeted as much as 14% in trading in New York on Wednesday. Constellation’s drop hit 8.8%, while Ford and D.R. Horton fell 3% or more. Union Pacific rebounded from an earlier decline and rose as much as 2.3%.

Corona Crosshairs

Among the most vulnerable companies under the incoming Trump administration is Constellation, which derives about 70% of its profit is from importing Corona and Modelo beer into the U.S. That could get more expensive if Trump imposes tariffs or alters trade agreements with Mexico, according to Susquehanna.

Less than two weeks ago, Constellation announced the $600 million purchase of a brewery in Mexico. On Monday, when it looked more likely that Hillary Clinton would win, Constellation shares had their biggest rally since April. The company has an investor day on Wednesday.

When Trump launched his campaign in 2015, he referred to Mexicans who had crossed the U.S. border as drug dealers and rapists. Companies such as Macy’s Inc. and  NBCUniversal reacted by severing ties with the real estate developer for fear of offending the U.S. Latino community. For those companies, it was an easy choice because Latinos are a growing, upwardly mobile group that brands are increasingly targeting.

Fluctuating Peso

Because Trump has assailed Mexico, its currency has fluctuated along with his chances of victory. As polls showed him gaining ground on Clinton in the final weeks of the campaign, the peso weakened. A central banker there has said a Trump presidency would be a “hurricane” for Mexico’s economy. After Trump’s victory, the peso tumbled more than 9%.

A faltering peso would hurt the results of foreign companies operating in Mexico by making sales there less valuable. The NAFTA railway is integral to trade, especially for automakers who have expanded manufacturing capacity in Mexico over the past few years because of cheaper labor. Many ship parts to Mexico and send back assembled cars to the U.S. for sale.

The impact could be felt as far away as in Japan. Nissan Motor Co. is the top-selling auto brand in Mexico, with a market share of 26% last year. Other top vehicle producers there include General Motors Co., Fiat Chrysler Automobiles NV, Volkswagen AG and Ford. Mazda Motor Corp. builds small cars in the country for its own brand and for Toyota Motor Corp., which plans to open a Corolla plant in 2019.

Other companies that would be closely watching the peso’s fluctuations include Spanish lender Banco Bilbao Vizcaya Argentaria SA, which makes two-fifths of its profit in Mexico. Dutch brewer Heineken NV counts Mexico among its top three markets. Engineering firm Obrascon Huarte Lain SA, gaming company Codere SA and Stabilus SA, a German maker of gas springs, all generate at least 20% of their revenue from the country.

Kansas City Southern Chief Financial Officer Michael Upchurch was asked about the risk of a Trump presidency last week. He said legal counsel has told the company that a president can exit a trade deal but that changing the tariff rates would require an act of Congress.

“This trade agreement has been good for a lot of companies doing business not only in Mexico, but in the U.S.,” Upchurch said during an investor presentation. “There are a lot of products that we move south into Mexico. Mexico is the largest buyer of U.S. corn.”

Ford Threatened

Trump has also threatened to slap a 35% tariff on any cars Ford builds in Mexico and ships back to the U.S. The automaker in September said it was moving small-car production from a factory in Michigan to Mexico, a move Trump attacked in the first answer of the first debate. The auto industry presumes that any tariff imposed on Ford will apply to all carmakers.

While permanent tariffs require congressional approval, a president can impose them unilaterally to protect domestic industries from unfair behavior by a foreign country, according to Donald Grimes, an economist at the Institute for Research on Labor, Employment and the Economy at the University of Michigan. President George W. Bush took such action on imported steel.

“Trump could impose a large tariff on vehicles and parts coming in from Mexico,” Grimes said before the election. “This would clearly hurt the profitability of the auto industry in the short run. The companies would respond to those tariffs by moving the location of plants that mostly export to the U.S. to other countries, such as Vietnam and China. The plants would not return to the U.S. There are just too many other low-labor cost countries around the world.”

Cuba Too

President-elect Trump may also have a profound effect on another Latin American country. He’s criticized President Barack Obama’s easing of trade relations with Cuba, which has enabled airlines like Southwest Airlines Co. and JetBlue Airways Corp. to enter new markets there.

“If the government regulations are that we cannot fly to Cuba, we will not fly to Cuba,” Andrew Watterson, Southwest’s senior vice president network and revenue, said in an interview before the election. “It’s that simple. It’s not material to our business. We think it’s a very exciting opportunity, so certainly as long as its allowed, we’ll continue to prosecute it and offer that to our customers.”

Another side effect of Trump making good on deporting millions of illegal immigrants is that they make up big portions of the workforce in U.S. industries like construction and agriculture. U.S. homebuilders such as D.R. Horton and PulteGroup Inc. are already suffering from a labor shortage that’s increased costs and slowed construction. Conservative estimates put the proportion of construction jobs now held by undocumented workers at 14%.

Mass deportations would translate into “fewer homes built in an industry already short in terms of housing supply,” Mark Boud, chief economist at the Washington-based research company Hanley Wood, said earlier this year.

For the construction industry, he said, it “would be devastating.”

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