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.

Graphic 1

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!

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