Woe Is Ford! Boo Hoo!
From an editorial on Missourinet (link via John Combest):
So if Ford develops an all-new vehicle, it’s investing about $3 billion before it even builds the production line and hires and trains the workers to put the vehicle together.
Woe is Ford! It has a high cost of production! Boo hoo!
I have no sympathy for the company and its high cost of production, given that it made $2.6 billion in profit in the second quarter alone and forecasts even more growth in the immediate future. (By comparison, the $150 million in tax credits that the Missouri legislature decided to give Ford is just a drop in the bucket!) Cars and trucks may be costly to produce, but they are also associated with high marginal revenues that cover this cost.
The debate on subsidizing Ford could benefit from a refresher on the theory of the firm.
This $3 billion investment for a new vehicle is a one-time upfront cost, and because Ford produces vehicles in very large quantities, that cost is diffused. Ford is making billions of dollars in profit, so we know that the marginal cost of producing a car is lower than the marginal revenue. Ford is a firm that operates in (what is supposed to be) a competitive industry; the perfect competition ideal is illustrated in the following graph:
Ford in the Short Run
If, perhaps, Ford finds that the marginal cost of producing a vehicle is lower than the price it can charge, it will lose money and will eventually choose to leave the market. Other firms that are able to produce the good at a lower average cost will enter the market instead because they can realize profit. This is how the competitive environment is supposed to work.
It would be beneficial if, instead of providing subsidies to profitable companies like Ford, the Missouri state government took a laissez-faire approach. Consumers would benefit, because they would be able to purchase goods at a lower cost instead of subsidizing private firms with their tax dollars. Producers in other industries would also benefit, because they would not be forced to compete at an artificial competitive disadvantage.
Wow, this is clearly written by someone who knows very little to nothing about the automotive industry.
Your chart is cute – but you are missing the point entirely on a much more basic level: supply and demand. States know that in the long haul THEY will GREATLY profit from the presence of automakers, and thus, are willing to make small subsidies upfront as a way to lure automakers in.
If MO didn’t offer the $150M, someone else would have, and a result the state would have lost far more than $150M in the long-term.
Also, your assertion that Ford will “make billions” from a single vehicle is completely naive, and only further demonstrates your complete lack of understanding of the industry.
You also fail to understand the risk to automakers, and the fact that Ford currently holds OVER $20 billion in debt. Although Ford has had a positive cash flow for five quarters, it, like every automaker, is far from out of the woods.
If the U.S. enters a double-dip recession as many suggest it may, Ford could find itself very easily in an unprofitable state due to the extreme need for a strong economies of scale model. When the economy dips, auto sales are the first to sink, and very quickly a positive $2.6B Q2 can become a negative Q3.
Comment by Mark — July 25, 2010 @ 6:10 p.m.