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Global Automotive: Changing Lanes

The recent shake-ups at General Motors and Ford mark the beginning of more restructuring, but worldwide, the industry is still growing.

Feb/Mar 06
There are two ways to look at the auto industry. Some say American companies are in deep trouble and the Big Three will seek government bailouts. Others point to sales and say the overall industry is in good shape. Doubtless, the industry is undergoing changes and will continue to transform itself in the quest for greater stability and profitability. But few echo the doom and gloom often portrayed in daily newspaper headlines.

"Though the average transaction price is not increasing, the sales volume is strong as consumers continue trading up," says David Healy, an automotive analyst with the Wall Street firm of Burnham Securities. "The automotive industry is in pretty good shape, though you'll see manufacturers getting away from SUVs into more gas-efficient models, and sales [of SUVs] may flatten out in the next few years."

Indeed, over the next three to five years, the industry can expect quite a bit of change, according to Neil De Koker, president of the Original Equipment Suppliers Association. "We will see consolidation of suppliers through mergers and acquisitions, and we'll see more collaboration between manufacturers and suppliers to increase efficiency and cut costs," he says. "Once this process is completed, we will see a more profitable American industry that can compete with global rivals."

For now, the South is still taking the lion's share of the new auto industry announcements in the United States, but experts are not counting out the Great Lakes region or underestimating the impact of Europe and China in the global market. Of course, before we can get to the future De Koker is predicting, the industry has to get through the rash of plant closures and bankruptcies that could leave some U.S. cities scrambling to replace jobs. For the most part, American industry players are looking for the bright spots in turbulent times.

Goin' South
The South is the undisputed hotbed of the U.S. auto industry, with more than $6 billion in new plants and expansions of existing plants in recent years. There's plenty of wealth to spread. Alabama, Georgia, Kentucky, South Carolina, West Virginia, and Texas are all benefiting from this site selection trend. Mississippi and Missouri are still popular choices, and Virginia's Roanoke Valley is becoming a favorite.

But Arkansas is on fire. The state has landed a wealth of suppliers and could be in line for a Toyota plant. A $35 million, 217,000-square-foot Denso Corporation facility will bring 500 jobs to rural Arkansas by 2008. Eakas Corporation's 91,000-square-foot auto parts facility in Wynne will employ 250 people. Then there's automotive supplier Systex Products Corporation, which built a $12.5 million manufacturing facility in Osceola to supply the Denso plant. And Hino Motors Manufacturing is building an $88 million manufacturing plant in Marion. It's a sea change for Eastern Arkansas.

Meanwhile, the auto industry is Tennessee's largest employer and that employer is just about to get a little bit larger. Nissan North America announced late last year it would move its corporate headquarters, along with approximately 1,300 jobs, from southern California to Franklin. Carlos Ghosn, Nissan's president and CEO, cited long-term benefits associated with overall investment and operational costs as motivators.

Great Lakes Still Afloat
Despite the doldrums of the Big Three automakers that call the region home, the Great Lakes area, which includes Detroit and Toronto, is not giving up so easy. The province of Ontario, which hosts a large segment of Canada's sizeable auto manufacturing industry, is in the midst of a five-year, $369 million incentives program targeting the auto industry.

After seeing three assembly plants close in the past few years and more expected to close in the coming years, Ontario is aiming its incentives at large projects that promise to bring a minimum of $222 million in capital investment or that create or save more than 300 jobs. Time will tell if Ontario can repeat the incentives-based success of the Southern U.S.

Kim Hill, automotive communities program director for the Center for Automotive Research in Ann Arbor, Mich., says Canada's national health plan could be an attraction to automakers, along with the reputation for efficient plants and a productive work force: "Toyota just announced a new plant not even 20 miles away from an existing plant. They cited access to human resources as the biggest driver."

What about Detroit? Does the South have a stranglehold on future plant locations? Despite the low labor and land costs, De Koker says the South remains challenged with the availability of a technically qualified work force. "The Northern states, which have been the traditional manufacturing hotbed, have more automotive talent available than any other part of the country," he says. "Southern workers do not have a manufacturing background and require more training. That could be a consideration going forward in the years ahead."

A Looming Labor Shortage?
Senior automotive executives say their industry will be particularly hard hit by the looming skilled labor shortage, costing individual companies an average $50 million over the next five years, according to a survey released in November 2005 by Advanced Technology Services.

"The looming skilled labor shortage is the single most important issue the U.S. automobile industry will be facing in the next five to 10 years," says Hill. "Due to anticipated retirements at existing plants, the expansion of U.S. production facilities by foreign-based manufacturers, and the general perception of manufacturing as an old technology industry, manufacturers will be hard-pressed to staff their facilities with qualified workers."

Despite the Great Lakes advantage, Healy expects the South to remain an attractive location as foreign manufacturers attempt to stay as far away as possible from the United Auto Workers Union, which imposes high labor costs and restrictive worker roles. Then there's the "make them where they buy them" theory, which Healy says is one factor that led Toyota to locate its pickup truck plant in San Antonio, Texas.

Making More in Mexico
Mexico has been a stout competitor for auto plants for decades, even more so in a post-NAFTA trading environment. Incentives are not the key motivator in Mexico since most taxes are federal, but the cheap labor is difficult to beat in North America. The battle for foreign auto investment is heating up south of the border, with the states of Baja California, Durango, Sonora, and Coahuila in fierce competition.

In February 2005, Baja California saw the opening of a new 700-acre Toyota assembly plant near Tijuana, just across the San Diego border, to produce Tacoma pickup trucks. The foreign automaker moved to double the size of its plant before construction of the first phase was even completed.

In the Northwestern interior, Durango hopes to move away from agricultural and mining traditions to become a premier auto parts supplier cluster. The $2.6 million Ford assembly plant expansion in Hermosillo could help Durango realize that dream. Let's not forget Coahuila, which has become known as the "Automotive Heart of Mexico" and currently produces 25 percent of the nation's vehicles.

"Asia is coming online with cheap labor and that has hurt Mexico, but the Big Three all have plants down there, along with Toyota," says Hill. "Auto makers will continue to explore the labor pool in Mexico, but the jury is out on the long-term decisions."

Asian Activity
There's a two-fold concern with what some are calling the "Asia Connection." One is that countries like China will woo manufacturing away from the U.S., with the promise of the coming insatiable appetite for vehicles among the world's largest population. The other is Chinese cars coming to America.

General Motors is expanding its Shanghai GM and SAIC-GM-Wuling manufacturing facilities to produce 300,000 vehicles a year. GM also relocated its Asia-Pacific regional headquarters from Singapore to Shanghai in what the company said was a move to expand its global reach. "I don't think China is a significant threat in the American market for a while," says William Niskanen, chairman of the Center for Trade Policy Studies at the Washington, D.C.-based Cato Institute, a nonprofit public policy research foundation. "It took the Japanese 10 years to demonstrate that their cars were reliable and attractive. It will take the Chinese even longer."

Enthusiasm in Europe
Europe continues to engage the auto industry in new ventures. The Czech Republic boasts an automotive employment base of more than 160,000 people, with Prague as a center of focus. Some have said the flood of foreign auto parts suppliers, including the recent addition of TCPA and Denso, have made the Czech Republic a new European Detroit.

"The U.S. market will slow its growth of new auto manufacturers locating here," says David Kim, corporate managing director in the Corporate Services Group of Julien J. Studley, Inc. "Many of these groups are taking a focus on Eastern Europe and also on Asia."

France and the United Kingdom have the most well-established auto clusters in Western Europe. France has clusters in automobile components, supplies, electronics, hydraulics, mechanical equipment, and metalworking. The U.K. is especially strong in automotive assembly plants in the Southwest, Southeast, Northwest, and East Midlands regions, with Honda and Press Steel Fisher manufacturing car bodies there. Experts say Western Europe can rebound as countries seek to improve productivity.

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