Presentation (PDF)

54th Annual Tennessee Governor's Conference on Economic and Community Development

It is a great honor to be here this morning and I thank Commissioner Kisber for extending this invitation to me and to The Council of State Governments. Established in 1933, The Council works primarily with state legislatures in tracking trends, carrying out research and analysis and promoting state interests. While I work for The Council's Southern Office, the Southern Legislative Conference (SLC) in Atlanta, The Council is headquartered in Lexington, Kentucky and also has regional offices in New York, California, Illinois and Washington, D.C.

My remarks this morning are based on a detailed report I completed in 2004 entitled The Drive to Move South: The Growing Role of the Automobile Industry in the SLC States and my ongoing research on this topic. My presentation comprises three broad areas. Part I contrasts the recent record of domestic and foreign automakers in the U.S.; Part II provides a sampling of the latest news regarding foreign automaker operations in the South; and Part III, identifies why the South has become such an attraction to foreign automobile assembly plants.

Part I

The current state of America's automobile industry is a study in stark contrasts. On the one hand, you have the Big Three (General Motors, Chrysler and Ford), the major domestic automakers – domiciled mostly in the Midwest – hemorrhaging vast amounts of cash and battling a range of structural problems. On the other, you have an increasing roster of foreign automakers – located mostly in the South – thriving financially and generating a panoply of positive economic benefits, locally and regionally. The fundamental transformation of the American automobile industry, a process that has been in play for several decades now, continues primarily at two levels: one, the shrinking percentage of vehicles manufactured and sold by the Big Three as a proportion of total vehicles and two, the emergence of the South as the locus of automotive activity in the United States with a host of foreign automakers establishing manufacturing plants in several Southern states.

According to 2007 U.S. Department of Commerce data, in 1986, U.S. automakers captured 73 percent of total passenger vehicle sales with the Japanese brands securing 21 percent, the German brands 3 percent and the Korean brands 1 percent. By 2006, U.S. automakers' share had plummeted to 53 percent while the Japanese brands had zoomed to 35 percent with the German and Korean brands increasing to 6 percent and 5 percent, respectively. In fact, in July 2007, U.S. automakers' share of the U.S. market dipped to below 50 percent for the first time in history.

In addition, Toyota beat General Motors in global vehicle sales for the first six months of 2007, selling 4.72 million vehicles, compared with GM's 4.67 million vehicles. Toyota surpassing GM in global sales signaled the end of GM's lengthy run as one of the most dominant players in all of global industry. Ever since GM surpassed Ford back in 1931, the company had dominated global vehicle production and sales for over seven decades.

In the midst of the rather dire news emanating from the domestic automobile industry, the presence of a number of thriving foreign automakers in the South continues to be a very positive phenomenon. The growing procession of foreign automakers establishing manufacturing facilities across the South began in 1983 when Nissan began production at a facility in Smyrna, Tennessee. Five years later, in 1988, Toyota began operations in Georgetown, Kentucky, further reinforcing a trend that has seen both these companies either establish or announce additional plants recently in Blue Springs, Mississippi and San Antonio, Texas (Toyota) and Canton, Mississippi (Nissan). In the next two decades, a raft of additional foreign automakers (Mercedes, BMW, Honda, Hyundai, Kia and the latest, Isuzu), either set up operations or intend to do so in many Southern locations. Consequently, the economic impact of the automobile industry in the South remains truly staggering, not only employing a substantial percentage of the region's workforce – hundreds of thousands in mostly high-tech, high-wage direct, indirect and induced jobs – at assembly plants, auto parts producers, service facilities and dealerships, but generating billions of dollars in wages, annual sales and government revenues, alongside the priceless effect of elevating the economic image of these Southern state economies. The presence of a Mercedes plant in Alabama, a BMW plant in South Carolina and Nissan's North American headquarters relocating to Nashville from California, certainly has eased in a sea change in both the perception and structure of these Southern state economies.

Part II

The most exciting news concerning the automobile industry and the South in recent months involved Toyota's February 2007 announcement that it would invest $1.3 billion to build its eighth North American assembly plant in Blue Springs, Mississippi, in the northeastern corner of the state. The 1,700-acre site, near Tupelo, will be the production site by 2010 for the Toyota Highlander. At full production, the facility will build 150,000 vehicles annually and is estimated to create 2,000 direct jobs ($122 million annual payroll); 4,900 indirect jobs ($168 million payroll); 1,402 induced jobs ($28 million payroll); 278 local government jobs ($9 million payroll); and 2,232 construction jobs ($161 million payroll over a two-year period). In turn, the state of Mississippi provided a $293.9 million incentive package to Toyota that included funds for infrastructure ($136.6 million); educational enhancement ($80 million); site preparation ($67 million); and other ($10.3 million). Additional, local government funds put the total package provided to Toyota at $358.5 million.

In late 2006, the ceremonial groundbreaking at the site of Kia Motors' first-ever U.S. manufacturing facility took place in West Point, Georgia, near the Alabama-Georgia border. Scheduled to begin production in 2009, this 2.4 million square foot facility is expected to produce 300,000 vehicles per year at full capacity. While the $1.2 billion Kia investment will employ an estimated 2,893 workers, an additional 2,600 employees are expected to be hired at five supplier facilities in Georgia. In order to lure Kia to Georgia, state and local officials harnessed a $258 million incentive package that included – from the state – $75.9 million in job tax credits over five years, $20.2 million for an on-site job training facility and $60.5 million to purchase the site; and, from the locals, $130 million in property tax abatements over 15 years. The Georgia Department of Economic Development estimates the plant will have a $4 billion annual economic impact on the surrounding communities in Georgia and Alabama.

Then, in April 2007, Isuzu Motors announced that it would begin construction at a site in Pinson, Alabama, to manufacture commercial trucks. The 300,000-square-foot facility is expected to reach a production capacity of 5,000 units a year by 2010 and provide jobs to almost 1,000 people in a few years. The Pinson facility will assemble trucks with a load capacity of four tons with the engines and platforms for these vehicles being imported from Japan. Isuzu's entrance into Alabama will signal the fifth major automaker to begin operations in the state (joining Mercedes, Honda, Toyota and Hyundai) since the mid-1990s, creating thousands of jobs at plants and parts suppliers. Economists have emphasized the tremendous economic impact of these Alabama auto plants. In July 2007, the state announced that the Mercedes plant alone contributed $6 billion annually to the state's economy – representing 3.7 percent of the $160 billion Alabama gross state product in 2006 – and, along with its suppliers, was responsible for 41,830 jobs across the state. In 1993, when Mercedes initially announced plans to establish a plant in Alabama – the company's first passenger vehicle plant outside Germany – the state offered $253.3 million in incentives.

BMW in South Carolina is another tremendous success story ever since the company announced plans to build a state-of-the-art manufacturing facility in Spartanburg County, South Carolina in June 1992. While the first American-made BMW, a 318i, rolled off the line in September 1994, the company has exported nearly 772,000 vehicles through June 2007. The total supplier and BMW investment between 1992 and 2007 in the Palmetto State amounts to a staggering $5.4 billion while the company has paid $1.5 billion in taxes and duties during the same period. South Carolina provided a relatively modest $130 million in incentives back in 1992.

Texas is another SLC state with a thriving automobile manufacturing sector and towards the end of 2006 the Lone Star state had 566 automotive manufacturing establishments directly employing nearly 36,000 with an average annual salary of over $51,000. In November 2006, Toyota officially opened its $1.28 billion dollar plant in San Antonio and began production of the Tundra full-sized pickup. While Toyota initially planned to roll 150,000 trucks off the San Antonio assembly line annually, the company decided to increase the plant's capacity to 200,000 before it even began production. The 2,000 acre site houses 21 suppliers who will employ approximately 2,100 at full production with a cumulative investment of about $300 million. In total, the Texas Toyota site will employ more than 4,000 at full production and represents a $1.6 billion investment.

Just like Nissan's move from Gardena, California to Nashville, the news from Volkswagen last week that it was moving its U.S. headquarters to Fairfax County, Virginia, from Auburn Hills, Michigan, is another piece of stirring news regarding the auto industry and the South. Volkswagen, which makes Volkswagen, Audi, Lamborghini and Bentley cars, is the world's fourth-largest producer of passenger cars and has a long history in the United States. The company will bring 400 jobs to the region and invest more than $100 million to set up a new office complex in Virginia and in turn, the state will offer incentives – pegged to achieving prescribed benchmarks – worth $6 million over five years.

Confirming that the automotive industry in the South now extends way beyond assembly operations to high-end research are the following two developments: (1) The Advanced Vehicle Research Center in Garysburg, North Carolina, a non-profit facility, created and funded by the state to provide a modern automotive testing facility for use in the design, development, testing and certification of advanced vehicle technologies, sub-systems and components; and (2) Clemson University's International Center for Automotive Research, a facility set up collaboratively by BMW, Clemson University and the state of South Carolina to develop the world's premier automotive and motor-sports research center.

Auto parts suppliers' flock to the vicinity of automobile assembly plants providing employment to thousands and the South has steadily captured an increasing share of this component of the industry. For instance, even though North Carolina does not have a major assembly plant, the state is a powerhouse on the parts supplier front and has more than 1,000 manufacturing operations supplying parts, accessories and components for automotive, truck, bus and heavy equipment industries.

In 2007, a sampling of the auto parts supplier news from around the region includes Mississippi's estimates that several tier-one suppliers to its new Toyota plant will generate 2,000 jobs and $122 million in payroll to the state by 2011; the Toyota supplier Boshuku, manufacturer of seats, fabrics, airbags and filters, moving its U.S. headquarters to Kenton County, Kentucky from Michigan; Hino Motors USA announcing a $70 million dollar expansion at its Marion, Arkansas facility bringing the company's total investment at the plant to $230 million; and, AW North Carolina, producer of transmission components in Durham since November 1998, maintaining an employee roster of 950 at its $390 million plant. Georgia is home to nearly 300 parts manufacturers and suppliers and more than 50 auto-related companies consider Georgia as their North American headquarters, including Saab, Porsche, Hella and Daewoo.

Part III

Given the incredible surge in foreign automobile industry activity in the South in the past 25 years or so, a great deal of interest surrounds the factors driving this trend. Experts identify several major items here.

(1) Foreign automakers greatly value the fact that they can construct new, ground-up manufacturing facilities – incorporating all the latest technologies – more efficiently and effectively at a Southern location, as opposed to reconfiguring older assembly plants in the Midwest and Northeast.

(2) Experts cite the economies of scale created by the cluster effect with the growing number of automobile assembly plants and thousands of auto parts suppliers in close proximity to each other in the South. According to Harvard University's Cluster Mapping Project, in 2004, 10 of the top 20 states in the automotive cluster – based on employment – were SLC states with Tennessee, Kentucky, North Carolina and Missouri ranking in the top half of this listing.

(3) Low, or non-existent rates of unionization, are also proffered as a reason for the location of these foreign automakers in the South.

However, salary and benefits at these Southern auto plants consistently exceed average rates in the South and sometimes surpass compensation paid to union workers at domestic car factories. For instance, union officials at the Mercedes plant in Vance, Alabama, routinely fail to sign up enough workers to hold an election regarding unionization. Similarly, union officials at the Toyota plant in Georgetown, Kentucky, have largely been a neutralized presence for over two decades now. Their biggest obstacle: a contented Toyota work force. In Kentucky, where the average worker earned $36,000 last year, $70,000 a year Toyota jobs are eagerly sought.

(4) Another major reason driving the move down South is the extremely cost-effective inter-modal transportation network in the region, spanning railways, highways, airports and, most importantly, ports. North Carolina, for example, emphasizes its prowess in this sphere by noting the following: some 80 percent of the motor vehicle assembly plants in the U.S. and Canada are within a day's drive from the state; the state has an impressive 78,000 mile highway network linking six interstates; multiple rail service carriers operating over 4,000 railroad miles; three international and 11 regional airports; and, two deep water ports in Wilmington and Morehead City. Similarly, Georgia notes that 83 percent of all U.S. auto assembly plants are within 13 highway hours of the state.

(5) Ports in the South are a particularly strong asset since they rank at the highest level of significance from a national trade dimension. In fact, the ports of Jacksonville, Florida; Baltimore, Maryland; Brunswick, Georgia; and Charleston, South Carolina – all Southern ports – handle more automobiles than any other set of ports in the country. Easy access to these ports from the plants and the efficiency with which these ports operate remain crucial factors in the location calculations of these foreign automakers.

(6) These Southern states also offer very persuasive incentive packages including tax breaks, worker training programs, an abundant labor pool and the ability to train a workforce that has not worked in the auto industry previously.

(7) Other general features such as the weather, reduced cost of living, lower or no personal income taxes, free or inexpensive property costs to build assembly plants, along with other attractive quality of life attributes, make these Southern locations very compelling.

Conclusion

In closing, while the domestic auto industry remains embroiled in a structural conversion that has resulted in layoffs for thousands, drooping sales figures and rising financial losses, several foreign automakers operate very successfully in numerous Southern locations. A number of distinct advantages, both financial and non-financial, contained in these Southern states lured these foreign automakers in the last two decades or so, a move that has completely shifted the economic orientation of these Southern locales from largely agricultural to high-tech, manufacturing economies. These foreign automakers and the cascade of auto parts suppliers and related activities that have set up operations in their wake remain a dominant feature of the new South's economic landscape. In addition to contributing significantly to the states' gross product, these auto plants and parts suppliers provide employment to tens of thousands, generate billions in diverse forms of revenue and create myriad other benefits. A number of economic studies conducted on the overall impact of the industry clearly demonstrate that their significant positive effects far exceed the economic incentive packages provided by the states. Thank you for your attention.