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Hopping on the NAFTA Highway: The New Automotive Corridor

The shift in automotive manufacturing has been disruptive to some regions, but a boon to others.

Oct/Nov 06
Twenty years ago, the automotive industry took a south-to-southwest turn just outside Detroit and there's been no looking back. With Michigan in the rear-view mirror, the road ahead looked bright for the then Big Three automakers. Mexico was the destination with a promise of low-cost labor and easy access to North American markets that promised to sustain their lead position and offer new markets.

Today, the North American automotive industry is on a new road, one that involves a shift in how "Big Three" is defined and where manufacturing can be most cost-competitive - not only for the domestic automakers, but for the "foreign domestics" as well. According to a report by Roland Berger Strategy Consultants (Troy, Mich.), "Passenger car and truck production in North America is only expected to grow by 0.8 percent per year, rising from about 15.8 million units per year in 2004 to 16.9 million units by 2012."

Given that, the landscape is changing. With Toyota Motor Co. now sitting in the number-two spot behind General Motors Corp., Detroit finds itself struggling to maintain its place as the automotive capital of North America. Other regions are in the spotlight, most notably Mexico and the South-Southeastern United States.

Automakers and their suppliers are ubiquitous in Mexico. Indeed, a map of Mexico's automotive industry looks like a Who's Who of global automakers. News regarding automotive expansions in Mexico includes an announcement that Lear is building a 100,000-square-foot facility next door to its existing Piedras Negras (Coahuila) operation; that Visteon has leased the 160,000-square-foot Brasa/Prudential building in the Reynosa Industrial Park and moved in during March with 200 employees; as well as announcements of a total of 15 new projects slated for 2005-2006 by what are called the "Big Six" automakers. In addition to GM, Ford, and DiamlerChrysler, these include Toyota, Honda, and Nissan - all of which have manufacturing plants throughout Mexico.

George Magliano, director of automotive research for Global Insight, says that Mexico is above average in growth and below average in risk factors, which makes it ideal for locating a new facility. The Mexican market is truly an open market, he notes, with some 25 brands being produced there. There is plenty of room for growth in that market as the number of vehicles sold in Mexico - and not made in Mexico - is enormous: "Two thirds are not made in Mexico, which means a huge opportunity to expand production," says Magliano. "Mexico is a developing market, so currently the Mexican auto industry is focused on building vehicles for the U.S. market, including big-truck programs such as the Ford F-150. They have de-emphasized small-car manufacturing in Mexico and are moving toward larger, more expensive cars."

Mexico is seeing 4 percent growth in light vehicle sales to 1.4 million units, compared to 1 percent growth in the United States, Magliano adds. The value of auto parts manufactured in Mexico reached $23.5 billion in 2005, nearly double that of 1995. Suppliers in the country are still in short supply, so to speak. Large OEMs are trying to attract suppliers, both domestic Mexican suppliers and U.S. suppliers, by erecting large "supplier parks" such as the one Ford Motor Co. has established in Hermosillo. The Ford Fusion is a "stellar program" that was moved to Hermosillo from the United States and Canada, Magliano notes.

Ford Motor Co. announced that it is considering building a new plant in Mexico, even as it is shutting down U.S. factories. Ford wouldn't confirm the report. However, Ford has a number of plants in Mexico already.

Ford's restructuring plan - dubbed the "Way Forward" - can't come soon enough. The company reported a $254 million loss in the second quarter of 2006, worse-than-expected sales in July, and another sales drop of 11.6 percent in August. In mid-September, the company announced plans to cut about 30,000 jobs from its North American work force by 2008 and to close more plants than previously announced.

Texas' proximity to Mexico has made that state an ideal candidate for companies seeking to supply the automotive market in Mexico, or to establish automotive manufacturing operations as stand-alone entities. San Antonio recently received a new $800 million Toyota assembly plant, the company's sixth North American assembly facility, as part of Toyota's commitment to expanding North American operations. The plant, located on a 2,000-acre site, will build the Toyota Tundra full-size pickup truck to the tune of 150,000 units annually when at full capacity. The plant will also have metal-stamping, body welding, painting, and plastics operations, along with assembly, and is expected to employ 2,000.

To accommodate this movement in North America, the Trans-Texas Highway - part of the Trans-Texas Corridor - will be built; it's the first leg of the NAFTA Superhighway, a route that will run from Mexico through the Midwest and up to Canada.

This summer China's state-owned Nanjing Automobile Group formed MG Motors North America to build the latest version of the legendary MG at the Ardmore Air Park (a former Air Force base) in Oklahoma. The Ardmore facility, which represents the first Chinese auto plant on U.S. soil, is expected to begin production in late 2008.

In mid-April of this year, the Chicago Fed held a conference at its Detroit Branch to examine the ongoing structural changes in the U.S. auto industry. One of those in attendance, Sean McAlinden, vice president of research and chief economist at the Center for Automotive Research, compared the relative strengths of the midwestern and southern production locations.

"Much has been written about the noticeably lower levels of unionization in the South," said the Chicago Fed Letter on the conference. "For example, the unionization rate in Alabama is 5.2 percent, compared with Michigan's 16.6 percent. Lower manufacturing wages, energy, and land costs make the South attractive for new business locations as well. In addition, the population center of the United States keeps moving southward and with it the share of U.S. vehicle sales. Finally, many of the southern states have offered sizable incentives to attract new auto assembly plants."

Foreign domestics seeking to manufacture in the United States - their largest market - have carved out a new automotive corridor in the South-Southeast with plants springing up in South Carolina, Kentucky, Tennessee, Alabama, Georgia, and Mississippi.

For more than a decade, BMW has been manufacturing cars in Spartanburg County, South Carolina, with the one millionth vehicle rolling off the production line this past February. The facility has also drawn 48 of the automaker's suppliers to the state.

Mississippi is home to a large Nissan facility in Canton, which has been the main attraction for a number of automotive suppliers to the state as well. Recently, Raybestos, a brake manufacturer, purchased a 206,000-square-foot facility in Greenwood and is relocating operations from two plants, one in Indiana and another in Michigan.

Alabama continues to attract the automotive industry, with the Alabama Automotive Manufacturers Association reporting 44,834 direct automotive jobs in 2005, up 44 percent from 31,197 jobs in 2003. The state is seeing changes in the auto industry. When the foreign domestics first came to Alabama - e.g., 10 years ago when MercedesBenz established itself in the state - they brought many of their suppliers with them, says Jason Wright, senior project manager for the North Alabama Industrial Development Association. "Now we're working with domestic suppliers who are capturing work from the foreign domestics, such as North American Lighting from Illinois, which needed to be in the South to be closer to its customers in the automotive industry."

North American Lighting supplies mostly Toyota and Nissan, but still felt like it needed to be in Alabama to get some work from some of the others such as Honda and Hyundai, which have plants in Alabama. "Alabama seems to be on everybody's radar screen within the automotive industry," Wright notes. "Ten years ago, we didn't produce a single vehicle in the state of Alabama except the lunar land rover. Today, we have 760,000 units of vehicle capacity, and over one million engines are produced in Alabama."

Nissan announced on August 31 that it had completed the first stage of its move from California to Middle Tennessee. The company currently occupies 12 stories in the BellSouth Tower in downtown Nashville. Nissan will remain in its temporary location for about two years. Its new $100 million, nine-story headquarters is being built in the Cool Springs area of Franklin, about 15 miles south of the city. Approximately 550 employees, or 42 percent of the company's corporate work force, chose to move to the Nashville area when Nissan decided to relocate its headquarters from Los Angeles.

This isn't Nissan's first move to Tennessee. The company has a 5.4 million-square-foot production facility in Smyrna, where the Altima, Xterra, and other models are made. Nissan also has an engine and transmission manufacturing plant in Decherd. Together, the two plants in Tennessee employ more than 8,000 workers. The corporate jobs Nissan brings to Tennessee have an average salary in excess of $80,000 annually.

NSK Steering Systems America, Inc., a global manufacturer of automotive steering systems and components, announced plans to open a new U.S. plant in Dyersburg, Tenn. NSK will occupy a 100,000-square-foot facility in the Dyersburg North Industrial Park and increase the size of the operation over time, as they phase in various production lines. The company will supply steering systems and components to companies such as Toyota, Honda, Mercedes, Nissan, and others. The company plans to employ up to 150 people over the next 3-4 years.

Toyota calls Kentucky home, as the company has been in that state for 20 years. Dennis Cuneo, senior vice president of Toyota Motor Manufacturing North America says, "Toyota selected Northern Kentucky as the site for its manufacturing offices because it is centrally located among our manufacturing plants and Midwest suppliers, and it has an excellent transportation system. As our North American manufacturing operations continue to expand, the quality and production engineering laboratory will play a growing role in a number of functions - including parts, components, materials testing, and warranty claim analysis."

The 42-acre site located in Erlanger, Ky., has a 358,000-square-foot facility that provides support for the 14 Toyota plants in North America, including the two under construction. Other facilities in the state include Toyota Motor Manufacturing Kentucky (TMMK) in Georgetown. Across Kentucky, Toyota employs over 7,400 people and has invested $4.5 billion.

A host of suppliers serve Toyota in the region, including many in Kentucky and neighboring states. Recently 10 suppliers received TMMK's highest honor as "Outstanding Business Partners," including Advanced Industrial Products, OfficeMax, and Precision Staffing Inc. in Lexington; Henderson Services LLC in Louisville; Milagro Packaging in Cynthiana; and Butcher Electric and Ark Inc. in Georgetown; as well as AOSafety in Indianapolis; CHD Meridian in Nashville; and Stillwater Technologies in Troy, Ohio.

Nippon Piston Ring of Japan recently announced an investment of $49 million in a new plant in Bardstown, Ky., its third U.S. manufacturing facility. And Akebono Corp., maker of friction materials and brake products, is relocating its headquarters from Farmington Hills, Mich., to Elizabethtown, Ky. The company opened its first U.S. plant in Kentucky in 1987, and currently has 1,200 workers in the Hardin County/ Elizabethtown area.

Speaking of suppliers, Roland Berger Strategy Consultants, Troy, Mich., notes in its latest report that while automotive suppliers have long held the "lion's share of value add" in automotive construction, accounting for 65 percent ($500 billion) of such content in the 57 million cars made globally in 2002, this figure will grow to 77 percent ($840 billion) for the 76 million vehicles to be made in 2015, with OEM's value-add share falling to 35 percent ($274 billion). That makes it even more critical for Tier One suppliers to be near the automotive OEMs and that they locate facilities in close proximity to the auto assembly plants in every region where the OEMs build vehicles.

"As traditional North American OEMs lose market share, supplier bankruptcies and crippling legacy labor costs will have an important impact on the future performance of the auto supplier industry," the Roland Berger report notes. "In the midst of these shifts, OEMs also are requiring their suppliers to assume more engineering and design responsibilities."

West Virginia can also boast of a Toyota plant, TMMWV, which makes four-cylinder engines and transmissions in Buffalo, W.Va. Over the past decade, Toyota has invested approximately $1 billion in five expansions of the plant, which now employs 1,050 workers. The state is also home to numerous suppliers such as Mayflower Vehicle Systems and NGK Spark Plug, among others.

Recently, Meiji Corp. announced the opening of a 2,000-square-foot sales office and warehouse in Eleanor, W. Va. The company is a distributor of automation equipment for the automotive industry and will be supporting TMMWV.

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