US: internal compact car production could be outsourced to lower costs image

Automakers in the US generally build the very large compact segment cars internally, while smaller cars are outsourced to places like Mexico, hurting competitiveness of the bigger cars.

Subcompact cars, which have a small earnings margin from the start, are usually built in places where manufacturing costs are lower, allowing the automakers to offer way better deals than on the three times bigger compact segment level – eating into sales from the slightly more profitable models.

“There’s definitely credence in the notion of the smaller vehicles being built in low-cost locations,” said Jeff Schuster, from market researcher LMC Automotive. “But the story here is about localization and how automakers will re-balance where they build cars to find efficiencies.”

“I think there will be increasing price pressures which may cause manufacturers to move production elsewhere. It’s a problem that the subcompacts can undercut price of the compacts, so the manufacturers need to be careful with the pricing,” adds Eric Ibara, an analyst at Kelley Blue Book.

For example, Dave Zuchowski, CEO of Hyundai Motor America, said that if subcompacts from rivals continue to hurt the compact Elantra sales, the automaker could move to build the model in Mexico. And Ford plans to move production of the subcompact Fiesta from Mexico to Thailand in 2016 to allow the plant to produce other models.