Why Manufacturing Is Leaving The Country?

Annual Data |  Ford Motor Company

All numbers in thousands

 

Period Ending Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Total Revenue 144,077,000  146,917,000  133,559,000  Cost of Revenue 126,215,000  128,055,000  116,154,000    Gross Profit 17,862,000  18,862,000  17,405,000      Operating Expenses   Research Development –  –  –    Selling General and Administrative 14,117,000  13,176,000  11,529,000    Non Recurring 305,000  208,000  77,000    Others –  –  –        Total Operating Expenses –  –  –            Operating Income or Loss 3,440,000  5,478,000  5,799,000          Income from Continuing Operations     Total Other Income/Expenses Net 424,000  1,322,000  1,964,000      Earnings Before Interest And Taxes 5,139,000  7,869,000  8,351,000      Interest Expense 797,000  829,000  713,000      Income Before Tax 4,342,000  7,040,000  7,638,000      Income Tax Expense 1,156,000  (135,000) 2,026,000      Minority Interest 1,000  7,000  1,000          Net Income From Continuing Ops 4,462,000  8,251,000  6,201,000          Non-recurring Events     Discontinued Operations –  –  –      Extraordinary Items –  –  –      Effect Of Accounting Changes –  –  –      Other Items –  –  –            Net Income 3,187,000  7,182,000  5,613,000    Preferred Stock And Other Adjustments –  –  –        Net Income Applicable To Common Shares 3,187,000  7,182,000  5,613,000

It’s Friday, we’ve made it through another week and the weekend is upon us, so it is time for our weekly shoot-the-shit. All shoot-the-shit rules apply; by the way, some of you noticed that on 9/11 we did not publish a shoot-the-shit topic. This was a conscious decision to honor those who lost there lives on 9/11. So, without further ado, we announce our shoot-the-shit topic for today….

Why is manufacturing leaving the country?

Ans: Is not our corporate tax rates.

The profit and loss statement above, belongs to Ford Motor Company. It is a condensed version for clarity but all figures are actual and stated in thousands.

Let’s take a look at Ford’s effective tax rate, which is calculated by dividing the income tax expense of $1.156 billion by the company’s income before tax of $4.342 billion and multiplying by 100. So let’s do that

1.156 / 4.342 = 26.62% This is Ford’s effective tax rate for 2014

To put things into perspective let’s compare Ford’s tax picture with a Hypothetical American dual earner household with two children and a home interest deduction. So, here we go…

Gross Income: $ 350,000 Deductions: $43,000  The taxpayer’s tax liability is $74,651.

Our citizen tax payer’s  average or effective tax rate is 21% compared to Ford’s 26.62%. I think it’s safe to say that Ford is not having its brains bashed in, sufficiently, to chase them out of the country? So, why are they building plants in Mexico and not in the United States?

To answer this question revisit Ford’s Profit and Loss Statement. Ford’s Total Revenue for 2014 was $144.077 Billion and the company’s Cost of Revenue was $126.215 Billion or 87.6% of Total Revenue. Now let’s take a look at Cost of Revenue. This is a number that consists of a variety of expenses that includes, direct labor, the parts and materials needed to build cars and other expenses that are directly attributable to production.

If by moving to Mexico, Ford can lower the Cost of Revenue from 87.6% to say 77.6% through cheap labor and purchasing cheaper parts from local manufacturers, Ford Motor can reduce its cost of revenue from $126.215 Billion to $111. 804 Billion, a savings of $14.346 Billion.

Earlier, we said that Ford’s effective tax rate is 26.62%, now let’s assume we enact tax laws capping Ford’s effective tax rate to 20%; that’s a savings of 6.62% on Income before taxes of $4.342 Billion, which translates to a savings of $287.440 Million

Moving to Mexico achieves a $14.346 Billion savings  vs. a $287.440 Million tax savings. Obviously Ford’s desire is to do as much of its manufacturing outside the United States and see a lower corporate tax rate; however, lowering the corporate tax rate alone does very little  to entice the company to build plants in the United States. A reduction in corporate and individual tax rates is ALWAYS highly desirable, but is it the driving reason manufacturers are leaving the country? In most cases the answer is No!  Let us know what you think!

Have a safe weekend. Get out to the range or do something with your buds and family!