Term Paper on "South This Report Is About the Automobile"

Quoted Instructions for "South This Report Is About the Automobile" Assignment:

From a logistical standpoint, why is the southern U.S. an attractive location for the auto industry?

Write a 4-5 page paper answering the question above.

//////////////////////////////////////////////////////////

Southern hospitality

Ward's Auto World; Detroit; Aug 2002; Brian Corbett

Abstract:

In one of the most dramatic changes to the US factory network since the Industrial Revolution introduced mass production and power-driven tools two centuries ago, the auto industry is shifting output to the Southern countryside and away from regions home to generations of assembly line workers. The auto industry is leaving behind logistics nightmares, unions and higher tax and property expenses for centralized locations in right-to-work states where land values are low and government incentives are extraordinary. When plants are up and running, there are fewer environmental issues. Activism is not as prevalent. Industry also is relatively new to the South. So new assembly plants do not have to over-compensate for older factories contributing disproportionately to emission totals. Furthermore, utilities costs are lower. After the products have been assembled, the South's location is superior to the Midwest or the East Coast for delivery.

Full Text:

Copyright PRIMEDIA Business Magazines & Media Inc. Aug 2002

[Headnote]

The auto industry is migrating south

In one of the most dramatic changes to the US. factory network since the Industrial Revolution introduced mass production and power-driven tools two centuries ago, the auto industry is shifting output to the Southern countryside and away from regions home to generations of assembly line workers.

The relocation of automotive manufacturing is threatening the economic future of East Coast and Midwestern states and creating a whirlwind of investment from Mississippi to South Carolina.

"I refer to it as the `Manufacturing Revolution," says Tony Grande, Tennessee Economic Development Corp. director.

The auto industry is leaving behind logistics nightmares, unions and higher tax and property expenses for centralized locations in right-to-work states where land values are low and government incentives are extraordinary.

Midwestern states - and Canada's Ontario province - are struggling to hold on to an industry that delivered national prominence and a large, well paid middle class. "The trends are not positive," says Canadian Auto Workers union President Buzz Hargrove.

However, it's North America's East Coast that is getting hit the hardest. A number of auto factories have closed there since the 1980s. General Motors Corp. facilities in Tarrytown (now called Sleepy Hollow), NY, Clark, NJ; and Framingham, MA, are just a few.

There is a chance six more East Coast assembly plants could be shuttered by 2005.

As part of its revitalization plan, Ford Motor Co. will idle its Edison, NJ, plant. GM's Ste. Therese, Que., Canada, facility goes dark this fall, and plants in Linden, NJ, and Baltimore will close in 2005 unless new products are assigned. That's more than 13,000 jobs lost, not including those from the supplier ranks and other spin-off employment.

Enlarge 200%

Enlarge 400%

Worker inspects a new BMW X5 SUV in Spartanburg, SC

It could get worse. GM's Wilmington, DE, facility has dodged death a couple of times and currently makes only one vehicle - the slow-selling Saturn L-Series - on one shift. The Chrysler Group's Newark, DE, plant could be a goner, too, if the Auburn Hills, MI-based company needs to cut capacity again.

Meanwhile, the auto industry is flocking southward like migrating birds in the fall. once known for producing cotton and tobacco, Dixieland today might be better recognized for producing cars and trucks.

Car factories are replacing farms and the auto industry is supplanting a textile industry, which has long-since withered.

Like an American manufacturing version of the ancient world's Fertile Crescent located between the Tigris and Euphrates rivers, southern automotive growth first sprouted between highways I-65 and 1-75. "We've been watching the trend of automotive employment pour south between 1-65 and 1-75 since the mid-1980s," says ***** McAlinden, director-Economics & Business Group at the Ann Arbor, MI-based Center for Automotive Research.

Nissan Motor Co. Ltd. ushered in the new automotive manufacturing era when it opened its first US. plant in Smyrna, TN, in 1983. "That is largely attributed as the spark that started the automotive manufacturing revolution and the birth of the southern automotive corridor," says Grande.

GM's Saturn Corp. followed Nissan to Tennessee later in the 1980s. Toyota Motor Corp. moved into Kentucky BMW AG set up shop in western South Carolina. DaimlerChrysler AG, Honda Motor Co. Ltd. and Toyota built plants in Alabama and soon will be joined there by South Korea-based Hyundai Motor Co. Ltd. Nissan is building another plant in Mississippi. Suppliers are relocating south, too.

There are many reasons for the auto industry's geographic shift, a trend most experts predict will continue. The most controversial motive is labor. "labor is just cheaper (in the South). It's by far and away the most powerful variable," says McAlinden.

It's not unusual for about 30% of the workforce to be unionized in Midwestern and Northeastern states and Quebec and Ontario. In southern states, the average is 4% to 5%.

No unions mean no strikes, lower pay and health expenses and fewer job classifications. Southern states aren't shy about advertising their lack of unions. "Right-towork status, non-union status continues to be a big attraction, particularly for foreign manufacturers," says Grande.

The United Auto Workers and Canadian Auto Workers unions in recent years have accepted reduced job classifications and improved productivity But that isn't convincing some auto makers. After fighting off organizing drives at its Vance, AL, plant, DC is looking at Florida and Georgia for a site to assemble Sprinter vans. "How far south do you have to go to dodge the UAW - the (Florida) Keys?" says McAlinden.

However, not all auto makers expanding in the South are looking to escape the UAW. GM, for example, currently is in the middle of a big expansion of its unionized pickup truck plant in Shreveport, L.A.

The facility has been one of several GM plants building S10 and GMC Sonoma compact pickups since it opened in 1981. After the expansion is completed next year it will build the next-generation products, the Chevy Colorado and GMC Canyon, and likely will become the sole source for those vehicles. Shreveport also will build the Hummer H3 - a smaller version of the H2 now hitting the market - if GM gives it the green light

"If there is a Hummer H3, it's coming to Shreveport," says ***** Berzina, senior vice president of the Greater Shreveport Chamber of Commerce. He says "11 or 12" new suppliers are building facilities in the area now to support the expanded assembly plant.

Enlarge 200%

Enlarge 400%

North American Vehicle Producing States and Provinces

(Ranked by 2001 Standing With Growth Compared to 1991)

He's hoping for more, because suppliers locating in northeast Louisiana also can feed the brand new greenfield plants sprouting in the South, especially Nissan, which is only three hours away In fact, he says at least one of Shreveport's GM suppliers already has won a Nissan contract.

The jobs being added at GM's assembly plant will definitely be UAW, but Berzina says whether or not the new suppliers in the area also will be unionized has not been determined.

With a considerably older workforce and higher wage scale north of the MasonDixon line, the auto industry does find a larger and cheaper labor pool to draw from in the South. "In Michigan, you've got 1 million people already working in manufacturing," McAlinden points out. "So if you open a new plant, you're sort of reaching toward the bottom of the barrel. In Alabama, with not much going on and the prospect of making $24 an hour, you're going to get people who probably would've gone to the University of Alabama. You get the best."

Eager to attract auto makers and high paying jobs, a few Southern states in recent years have pulled out all the stops - as well as their wallets. Nissan received $360 million from Mississippi for a 3.5 million-sq.ft. (325,000-sq.-m) factory that will employ 5,300 workers. With lower unemployment and higher wages, Midwestern and East Coast states have shied away from the high stakes incentives war

Michigan offered $118 million for Mercedes' first US. facility But Alabama, which ranks 43rd out of the 50 US. states in per-capita income and has an average hourly wage of S 11. I 1.81, snagged the plant with incentives totaling $253 million, or $169,000 for every job Mercedes initially promised.

When taxes are paid, southern levies are lower than most Northern states. GM's Hamtramck, MIG, plant, for instance, has one of the highest property tax millages in the US. at 88 mills. "Michigan is not the cheapest state to do business in," admits Doug Rothwell, director-Michigan Economic Development Corp.

Property is less expensive to buy in the South and more available for future expansion. Construction labor is cheaper, too "Greenfield is always easier. Greenfield down South is easiest of all," says McAlinden.

When plants are up and running, there are fewer environmental issues. Activism isn't as prevalent. Industry also is relatively new to the South. So new assembly plants don't have to over-compensate for older factories contributing disproportionately to emission totals. Furthermore, utilities costs are lower. "It is 5 cents a kilowatt down (South)," McAlinden notes. "You try to get industrial rates for under 7.5 cents in Michigan or Ohio. You can't get it. That's a huge difference per kilowatt."

Tennessee has some of the lowest industrial power rates in the US., anywhere from 20% to 50% below other states, Grande points out.

After the products have been assembled, the South's location is superior to the Midwest or the East Coast for delivery If labor isn't the most important reason for the South's manufacturing rise, then it's location. "The old theory was that you built close to market. The new theory is to centralize manufacturing," says Mike Flynn, director of the University of Michigan's Office for the Study of Automotive Transportation in Ann Arbor.

Tennessee is within one day's drive of 75% of all US. markets, and its road system is one of the best in the nation. Other southern states are improving infrastructure. Besides 1-65 and 1-75, which are straight shots to the Midwest, highways I20 and 1-35 provide quick access from the South to Mexico's burgeoning auto industry. Meanwhile, Michigan, for example, is a peninsula state with roadways that generally are in bad shape. The East Coast has fewer major parts suppliers. Components coming from the Midwest and the South add significant shipping costs to vehicle programs.

The traditional manufacturing states realize they're on the ropes, but so far haven't been dealt the knockout punch. "I guess the best way of saying this is Michigan grew 60,000 manufacturing jobs in the last decade, while the nation lost 600,000 manufacturing jobs," says Rothwell. "We're the only state in the nation with three assembly plants under construction" or recently opened, he adds, referring to GM's greenfield factories in Lansing and Delta Twp. and Ford's brownfield project at its Rouge complex in Dearborn.

Michigan also is home to 98% of North American auto research and development and the fourth greatest concentration of high-tech workers of any state.

New York, Ohio and other states also are courting white-collar jobs with some success. But diversification efforts are hurt by the regions' smo*****ack image. And in the end, attempts to halt the exodus of assembly plant jobs might be futile. "If the Big Three continue to lose market share, jobs will continue to go south," Flynn predicts. "They lose share, we lose jobs."

- with Alisa Priddle and Drew Winter

Enlarge 200%

Enlarge 400%

Regional Share of North American Production

[Sidebar]

Capacity Shifting to the South

[Sidebar]

Most of the new capacity on tap for North America between now and 2006 will be located in the East South Central Region (ESC) of the U.S., which includes Alabama, Kentucky, Mississippi and Tennessee. But that new plant construction and expansion won't be enough to stem the overall decline in North American capacity over the next four years, an analysis by Ward's shows.

Currently, U.S., Canadian and Mexican plants have straight-time capacity to assemble 18.11 million vehicles annually. Ward's is forecasting that to fall by 1.4% to 17.85 million cars and trucks by 2006.

The ESC's share of North American capacity will rise from a current 11.0% to 16.6% by 2006, the result of growth in the region and decline in vehicle-building capability elsewhere on the continent. The biggest boosts will come from a new plant under construction in Mississippi by Nissan Motor Mfg. Corp. U.S.A. - slated to open in 2003 - and from Hyundai Motor Co. Ltd., which will have a plant up and running in Montgomery AL, by 2006.

Furthermore, Honda of America Mfg. Inc. opened a plant late last year in Alabama and will be increasing capacity there. DaimlerChrysler AG's Mercedes unit will hike capacity at its Alabama facility, as well. Nissan also is expanding capacity at

[Sidebar]

its plant in Smyrna. TN. The other big manufacturer in that area is Toyota Motor Mfg. North America Inc., which builds cars and minivans in Georgetown, KY.

With these increases, the ESC will have straight-time capacity to build an additional 1 million units.

Areas that will lose capacity include Canada: the Eastern seaboard of the U.S. from New Jersey to Georgia; the East North Central (or the Great Lakes States) region, and the West North Central (WNC).

Production in the eastern seaboard - or Mid-Atlantic and South Atlantic regions will be reduced by some 700,000 units, mostly due to anticipated shutdowns of General Motors Corp. and Ford Motor Co. plants in New Jersey and a GM plant in Maryland. The WNC will lose share when Ford closes its facility in St. Louis, which has estimated straight-time capacity of about 200,000 units.

In Canada, planned plant closures by each of the Big Three will cause production capacity losses of some 300,000 units, leaving the country with a 15.7% share of North American straight-time capacity, vs. 17.3% in 2002.

Meantime, Mexico will continue to increase its share of production capacity, but more so due to losses in other regions than new brick-and-mortar.

--------------------------------------------------------------------------------

Return to Module 3 Case Assignment